While most companies are still busy getting their Q3 results out the door, voice-recognition specialist Nuance Communications (NASDAQ:NUAN) is already prepared to give us its fiscal Q4 and full-year 2006 results. You'll have to wait till Tuesday afternoon to get the full skinny on the numbers, but today, we'll tell you what we can in advance.

What analysts say:

  • Buy, sell, or waffle? Seven analysts track Nuance, where buys outnumber sell ratings 6 to 1.

  • Revenues. On average, they're looking for a 111% improvement in quarterly sales, to $130.7 million.

  • Earnings. They think profits did even better, and will hit $0.14 per share.

What management says:
Did I say Nuance was ahead of the herd in wrapping up its fiscal year on Tuesday? Check that -- the firm's actually jumped the gun and told us what it'll (likely) tell us already. In a "preliminary results" press release issued on Halloween, management predicted that its revenue number next week will come in between $126 million and $128 million (just shy of analyst estimates). As for the bottom line -- ever a dicey proposition with this company -- it forecast a loss of a penny or two under generally accepted accounting principles, or a profit of $0.13 to $0.14 under its own special formula of pro forma accounting. Pro forma, therefore, is the number analysts are focusing on here.

For the record, each of these metrics, if achieved, will represent an improvement over what Nuance was promising investors in its August guidance.

What management does:
The business continues to score gross margins in the low-to-mid-70s, but there is no apparent trend either upward or downward here. As for operating and net results, these remain difficult to interpret by the firm's continuing amortization of goodwill, which is depressing the GAAP results. That said, a Fool has to admit that under GAAP accounting, the trends we do see at the bottom line aren't good.

Margins %

3/05

6/05

9/05

12/05

3/06

6/06

Gross

74.1

73.7

74.2

74.8

75.5

73.9

Op.

1.3

2.2

5.3

1.5

5.0

6.0

Net

(2.2)

(1.8)

(2.3)

(5.4)

(5.2)

(7.3)
All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
That also said, the same Fool might be better off studying the firm's production of cash profits -- free cash flow -- than trying to interpret the GAAP results with their inherent confusion caused by the aftereffects of the Dictaphone acquisition.

Free cash flow-wise, Nuance has generated $15 million so far this year, which is more than three times what it had generated by this time last year. Judged against the 53% year-over-year increase in revenue year to date, that looks pretty good at first glance. However, if you annualize this year's free cash flow and measure the resulting $20 million against Nuance's $2 billion market cap, the resulting price-to-free cash flow ratio of 100 looks frightening indeed.

Finally, did I mention that management released its preliminary results on Halloween? Then let's also point out that its prediction of $25 million in operating cash flow, if achieved, would fall below the year's trend line of $27 million. Subtract out capital expenditures, and this suggests that the price-to-free cash flow ratio will in fact move farther into the triple digits on tomorrow's news.

Long story short, Hidden Gems has recommended this company based on its future prospects. That makes it more risky than a valuation-based call, so make sure you've done your homework before taking the plunge. As for me, I'll just sit on the sidelines and observe.

Competitors:

  • Adobe (NASDAQ:ADBE)
  • Avaya (NYSE:AV)
  • Cisco (NASDAQ:CSCO)
  • IBM (NYSE:IBM)
  • Microsoft (NASDAQ:MSFT)
  • Nortel (NYSE:NT)

Who's right? Rich or the Hidden Gems crew? Before you buy my argument, note that the average return to Hidden Gems members from co-lead analyst Bill Mann's two recommendations of Nuance tops out at 38% -- in less than a year! So there may well be more to this story than meets the eye. For the Fool exclusive on why Bill loves the stock, claim a free trial of the newsletter.

Fool contributor Rich Smith does not own shares of any company named above. Microsoft is a Motley Fool Inside Value pick. The Fool has a disclosure policy.