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Nuance Sees Faster Growth for 2018

By Dan Caplinger - Feb 9, 2018 at 12:57PM

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Find out why investors like the company's prospects for the coming year.

Voice recognition is playing a vital role in driving several key technology initiatives, and Nuance Communications (NUAN) has long been a leader in that key space. In order to take maximum advantage of its opportunity, Nuance has sought to transform itself to focus more strongly on the most profitable business niches in its wheelhouse.

Coming into Thursday's fiscal first-quarter financial report, Nuance investors were looking for solid performance from the company, but they wanted to see signs that the future could be even brighter. Nuance delivered hope in the form of boosted guidance for the coming year, and signs of good market demand were especially encouraging.

Two people in chairs in front of Nuance logo with slogan regarding Dragon on opposite blue wall.

Image source: Nuance Communications.

Nuance looks forward to top-line gains

Nuance's fiscal first-quarter results perked up from what the company reported last quarter. Adjusted revenue bounced higher by 2.6% to $508.8 million, which just barely exceeded what those following the stock had expected to see. Adjusted net income rose 5% to $80.7 million, and that worked out to $0.27 per share. That topped the consensus forecast among investors for $0.26 per share.

Nuance got a modest boost from tax reform. The company said that revaluing its net deferred tax assets and liabilities resulted in a $96 million one-time gain, offset partially by a $14 million charge due to deemed repatriation of foreign earnings. Lower tax rates should have a positive impact on profits.

Beneath the surface, Nuance's fundamental performance was a bit mixed. Organic growth came in at 1% compared to the previous year's quarter. Net new bookings remained strong, rising 10% to $418.4 million and sustaining a good pace of growth from past periods. The company said that the automotive and enterprise businesses contributed the most to bookings performance for the quarter. One troubling sign came from Nuance's recurring revenue numbers, where its share of total revenue fell 2 percentage points to 71%. That's not ideal for the company in light of its ongoing shift toward subscription-based services.

The enterprise business was Nuance's most successful segment, posting sales gains of 4% and a nearly 5 percentage point boost in profit margin. Nuance said that digital and omnichannel engagement solutions, artificial intelligence, and voice and security applications all contributed to the strong performance. Healthcare also stood out, with 3% sales gains stemming from Dragon Medical's success and the introduction of AI-related capabilities for physician documentation and diagnostic imaging.

Not all of Nuance's businesses did as well. Mobile saw a 2% drop in revenue that led to a plunge of more than 8 percentage points in profit margin. Despite automotive growth, declines in handset revenue hurt the company. Imaging sales were higher by 7%, but a nearly 6 percentage point profit margin drop weighed on the segment.

What's ahead for Nuance?

CFO Dan Tempesta was pleased at how far Nuance has come. "Three years ago, we undertook a plan to transform our business and today, with our first-quarter results, we reached a milestone of returning to organic growth," Tempesta said. The CFO noted how a combination of efficiency, innovation, and drive helped lead to winning results.

Nuance has high hopes for the future. In its latest guidance for the 2018 fiscal year, the company said that it expects net new bookings to grow between 5% and 7%, and organic growth should be between 3% and 5%, up by 1 percentage point from its previous projections for organic growth. Nuance added $0.05 to $0.08 per share to its full-year fiscal 2018 earnings range, coming in at $1.14 to $1.20 per share on an adjusted basis. Weaker margin will slightly offset higher sales expectations.

More immediately, fiscal second-quarter guidance was mixed. Adjusted revenue of $511 million to $525 million was skewed above the consensus forecast, but adjusted earnings calls for $0.26 to $0.28 per share were lower than what investors expected to see.

Nuance investors didn't react strongly to the report, and the stock was down almost 2% at midday Friday after the Thursday evening announcement, despite having been higher near the open. The voice recognition specialist still has a long way to go before making the most of its full potential, but it's making smart moves to try to put its experience to use more effectively and profitably.

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