Motley Fool Hidden Gems
recommendation Nuance Communications
Normally, I'd kvetch about the use of pro forma numbers, but in this case, so much of the GAAP calculation involves decidedly non-cash charges. From a slightly more conventional angle, you might want to look at income from operations (EBIT) -- $12.1 million versus $1.7 million last year. Not bad at all. If you insist on GAAP income figures, there was a $7.6 million net loss this time, smaller than last year's $9.4 million.
Nuance pays a lot of interest on its loan balances, so the leveraged balance sheet cost the company a net $7.6 million in interest charges this quarter. But then there's the kicker -- the company's effective tax rate for the quarter showed an increase of 197% and tapped the bottom line down into red-ink territory.
Such is the life of an active acquisition strategy, and there's more to come. Nuance should close on two more purchases in the fourth quarter, which could bring in another non-cash tax charge and inspire the release of another $150 million in senior convertible notes.
But is this the right time to go nuts in terms of acquisitions and growth initiatives? The market for Nuance's speech and character recognition software is blowing up -- in a good way -- and management told us about new or expanded deals for enterprise and embedded speech recognition packages with companies like Dell
Yes, these acquisitions can be costly in the short term, but Nuance keeps tacking on every provider of competing or similar services it can think of, and is the clear leader in this exciting space. And if you thought this quarter was good, consider the fact that the Imaging Solutions division turned in a weak performance as customers waited out the release of OmniPage 16 right at the end of the quarter; the next report should sound even better.