Have other drivers ever caught you chattering away to yourself alone in your car? Well, now you have an excuse. Nuance Communications (NASDAQ:NUAN) makes it entirely acceptable to appear to be holding one-sided conversations with yourself, since you can blame it on the navigation system or the wireless phone. Just ask your car's navigation system to "go home" or your wireless phone to "call Mom" and the magic that is Nuance's embedded speech application turns command into action. Not that this is a profitable enterprise -- yet.

Stardate Q1 2007
It was another losing quarter at Nuance -- at least, if you like your companies to play by GAAP rules. By those rules, Nuance lost $0.01 per share, which is slightly better than the $0.04 lost last quarter and the $0.03 lost in the same quarter last year. Things appear to be moving in the right direction.

The company likes to feature non-GAAP numbers prominently in its conference calls. What's the difference this time? Non-GAAP earnings were $0.13 -- a difference of $0.14. That amount is significant, and it turns a losing quarter into a convincingly profitable one. Here's how it's done:

Start with net income


Add non-cash expense and one-time charges:



Options expense


Non-cash interest


Acquisition adjustment


Non-cash taxes


Non-GAAP net income


And you get:



Dollars in millions. From Nuance earnings release, Q1 2007.

So where's the truth? Maybe somewhere in the spread. Whether we like it or not, options are expenses that are here to stay. And if acquisitions are an integral part of a company's growth strategy, as they are with Nuance, acquisition expenses should count. The non-cash tax expense -- well, let me think about that one.

Ahead warp factor 5
This quarter was still below light speed. But management promises warp speed for the second half of fiscal year 2007. Of Nuance's major business segments, only customer care speech was up convincingly. This is the segment that provides the friendly HAL 9000-esque voice-activated service many businesses now use instead of the touch-tone phone tree.

Here is how the business segments performed sequentially:

Q1 2007

Q4 2006


Network speech












Embedded speech




Non-GAAP. Dollars in millions. From the company conference call.

If time travel makes you queasy, stop here
Management has predicted the second quarter will be another unprofitable one by GAAP accounting. Many of us believed Nuance would cross the Delta Quadrant into GAAP profits in Q2. However, it looks like this is not to be; Nuance has guided to a $0.01-$0.02 loss on GAAP revenues of $130.5 million to $134.5 million. Non-GAAP earnings are estimated at $0.11 to $0.12. Full-year guidance remains at revenues of $555 million to $570 million, but no earnings per share are estimated.

Beam me up, Scotty, and plot a course for the next quarter.

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Nuance is a Motley Fool Hidden Gems recommendation. To find out more about this and other undiscovered small caps, you can take a 30-day free trial.

Fool contributor Jean Graham owns no shares of Nuance. The Fool's disclosure policy promises never to employ a robotic voice to repeat the phrase "I'm sorry, I didn't quite understand you" 50 times until you hurl the telephone.