After laying out its fiscal third-quarter 2008 results, speech and imaging solutions firm and Motley Fool Hidden Gems recommendation Nuance Communications (NASDAQ:NUAN) saw shares take a 9% drubbing yesterday. What radical change in the business prompted the drop? Well ... nothing at all, really.
Nuance reported fairly predictably revenue and earnings -- or lack thereof. Revenue was $216.7 million on a GAAP basis, 38% better than last year. The bottom line was in the red by $9.9 million, slightly worse than last year's $7.6 million. But non-GAAP comparisons, which factor out acquisition-related expenses and stock options, were actually slightly ahead of analysts' average expectation.
The regular stream of acquisitions -- though costly -- continues to show fundamental benefits in operations. Nuance has seen its organic business grow by 14% this quarter. The mobile embedded revenue from A-list customers such as Nokia (NYSE:NOK), Samsung, and LG is the strongest segment at 34% organic growth. Demand for Nuance's on-demand solutions across all business segments was also particularly strong too, up 42% organically.
Offsetting the growth, the company has seen a big drop in sales of its Dragon NaturallySpeaking speech software line, but this was anticipated as Nuance prepares to launch the latest version. Nuance has also seen some weakness in enterprise solutions, as larger economic conditions curtail spending at large firms.
But even dropping sales and dire outlooks from U.S. automakers like GM (NYSE:GM) and Ford (NYSE:F) doesn't concern Nuance CEO Paul Ricci much -- since Nuance solutions are seeing increasing adoption in more models, the overall sag in auto sales isn't translating into declines at Nuance. A long design-to-revenue cycle also keeps revenue stable, and the company expects exceptional growth in embedded speech solutions to continue.
On-demand solution sales are also expected to make up 20% of revenue in the next quarter and nearly 30% in fiscal year 2009. New agreements with large clients like Cisco (NASDAQ:CSCO), Citibank (NYSE:C), Visa (NYSE:V), and Walgreen will also help the company move towards its objective of 20% organic growth.
Nuance is also making a dent in those pesky margins, with operating margins expanding and operating cash flow growing to $48.1 million this quarter. Nuance is still a long-term investment story, but the picture still looks bright.
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