As most of the firms on Wall Street queue up to report their end-of-year numbers, speech-to-text specialist Nuance Communications (NASDAQ:NUAN) is once again a step ahead of the pack. When reporting its earnings news on Monday afternoon, it's fiscal Q1 2007 that it'll be talking about.

What analysts say:

  • Buy, sell, or waffle? Eight analysts track Nuance; buys outnumber sell ratings 7-to-1.
  • Revenues. On average, they're looking for 71% better sales, at $129.1 million.
  • Earnings. Profits are predicted to rise 43% to $0.10 per share.

What management says:
Nuance continued its acquisition spree this quarter, as yet another company became "new to Nuance." This time, the target was a little firm called MobileVoiceControl, which, as the name suggests, operates in the field of voice-activated commands in mobile devices (Palms, Blackberries, and the like.)

Terms of the deal were not disclosed, but my fellow Fool Tom Taulli surmises that the price tag was a modest $20 million or less -- a far cry from the nine figures Nuance paid to acquire Dictaphone. Nor do we know whether Nuance's new business is a profitable operation. At the least, though, it should add some revenues to supplement what CEO Paul Ricci termed "robust revenue growth across all its speech solutions" at Nuance last quarter.

What management does:
As far as GAAP is concerned, revenues remain the story at Nuance. As fellow Fool Jean Graham discussed in writing up last quarter's earnings, a whole slew of special charges continue to stand between Nuance and GAAP profitability. The good news, though, is that operating margins have been rising for two quarters running now, so at least the company's moving in the right direction on an operating basis.

Margins

6/05

9/05

12/05

3/06

6/06

9/06

Gross

73.7%

74.2%

74.9%

75.5%

73.9%

72.8%

Operating

2.2%

5.3%

2.8%

5.0%

6.0%

8.4%

Net

(1.8%)

(2.3%)

(5.4%)

(5.2%)

(7.3%)

(5.9%)
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:
When previewing the earnings release of a Motley Fool Hidden Gems recommendation such as Nuance, I like to give readers a peek at the most recent six-month review of the stock -- the current thinking of our Hidden Gems co-analysts Bill Mann and Tom Gardner. However, with our most recent update having come out less than 60 days ago, this information is currently "embargoed." (Hint: Readers willing to accept a month-long trial subscription can still read the update for free by clicking here.)

Which is not to say there's nothing interesting I can tell you. In November, Hidden Gems team member Jim Gillies reviewed the Q4 2006 earnings news for our weekly online feature called, appropriately enough "Hidden Gems Weekly." There, he shed some light on how investors can best wade through the flurry of non-GAAP numbers that Nuance puts out while it's waiting for GAAP-profitability. Says Jim: "Results are still a confusing mess due to the many bits and pieces tacked on through acquisitions. ... Nuance would have you add back one-time acquisition costs (OK) and non-cash expenses associated with interest, taxes, and option compensation (umm ... no)."

In other words, don't just take management's word on what numbers are important. Regardless of what it says is important, hold the firm accountable for the expenses it incurs in financing its debt, paying its taxes, and gifting stock options to its employees.

Competitors:

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

Microsoft is an Inside Value pick.

Fool contributor Rich Smith does not own shares of any company named above.