Shares of voice-recognition specialist Nuance Communications (NUAN +0.00%) soared on Friday, tapping fresh 52-week highs in the process. The company reported a mixed fiscal third quarter, but for the most part it seems that investors were satisfied.
Adjusted revenue during the quarter came in at $488.7 million, a healthy head above the $480 million consensus estimate. By the time that trickled down to the bottom line, investors were looking at $0.32 per share in adjusted profit, again topping the Street's best guesses of $0.30 per share in adjusted profit. Both top and bottom line results also topped Nuance's own guidance.
Reading deeper
Speaking of guidance, investors overlooked the fact that fiscal fourth quarter revenue is expected to come in below the consensus. Revenue in the current quarter should be in the range of $487.5 million to $503.5 million, a bit short from the current $509 million consensus estimate.
The company also reported strong net new bookings of $484.4 million, a considerable 47% jump from a year ago. That puts Nuance on track to hit its guidance for the full fiscal year, according to freshly appointed CFO Dan Tempesta.Nuance attributed the strong bookings to "several unusually large contracts" in its automotive business, which was complemented by continued strength in the healthcare segment.
Investors have probably grown wary of hearing this next theme, but the strengthening dollar continued to create foreign exchange headwinds. Specifically, Nuance took a hit to the tune of $17 million thanks to the challenging FX environment. For the full year, the negative impact from foreign currency movements is expected to be $59 million, higher than the previously anticipated $55 million in damage.
Cutting costs
Nuance had previously announced a transformation program aimed at reducing costs by $125 million on an annual basis by the end of fiscal 2016. This is meaningful because on a GAAP basis, Nuance frequently operates in the red because it is constantly amortizing intangibles and taking acquisition and integration charges from all of the smaller companies it purchases. Nuance's GAAP net loss during the quarter was $39.4 million, or $0.13 per share.
These cost reductions will be generated both from cost of goods sold as well as operating expenses, which should help bolster the bottom line.
Booming businesses
Healthcare remains the most important operating segment, bringing in nearly half of all sales. Nuance has spent the past few years transitioning its business toward a recurring revenue model, and continues to make solid progress on this front. At this point, recurring revenue comprises 75% to 80% of sales in the healthcare segment.
Once upon a time, investors considered the smartphone market to be a promising catalyst for Nuance, but the opportunities there haven't been able to materialize due to industry consolidation, and market dynamics have had an adverse impact on pricing. Automotive on the other hand, is proving to be a very promising market. A handful of major auto makers contributed to the previously aforementioned "unusually large contracts" that resulted in over $100 million in bookings. Importantly, pricing remains robust in this business, as Nuance offers a comprehensive solution to automakers looking to integrate voice technology in vehicles.
Another benefit of the growing automotive business is that those bookings create visibility for the company. Nuance bills when a car is shipped, but revenue is recognized over time. Since cars tend to have long useful lives and, Nuance gets a pretty good picture of its future revenue recognition pipeline. This is in part why deferred revenue jumped 24% this quarter to $647.6 million, which is sitting on the balance sheet waiting to be recognized.
Overall, it was a strong quarter, and investors are rightfully pleased.
