As most of the firms on Wall Street queue up to report their numbers for the first quarter of the year, speech-to-typeface specialist Nuance Communications (NASDAQ:NUAN) is once again a step ahead of the pack. When reporting its earnings news tomorrow afternoon, it'll be fiscal Q2 2007 that it talks about.

What analysts say:

  • Buy, sell, or waffle? The 10 analysts tracking Nuance split their ratings evenly between buy and hold.
  • Revenues. On average, they're looking for 86.5% sales improvement to $133.8 million.
  • Earnings. Profits are predicted to rise 83% to $0.11 per share.

What management says:
Nuance's acquisition spree continues. Last month, it completed the successful purchase of BeVocal, "a provider of on-demand self-service customer care solutions." In addition to the technological benefits, the new prize brings with it a "predictable, recurring revenue stream derived from a software-as-a-service (SaaS) business model" -- a model made famous by (NYSE:CRM). A February press release put the depth of that revenue stream at about $22 million this year and $68 million next year. Nuance expects that earnings will not be affected this year and about a penny per share will be added in 2008.

This acquisition follows the March announcement of a similar deal closing on Focus Infomatics. That company is expected to bring with it about $8 million a year in revenues this year and $20 million next year. It's supposed to cost Nuance $0.01 to $0.02 per share in profits this year and perhaps another penny in 2008.

Nuance will pay $140 million for BeVocal -- $15 million in cash, plus 8.2 million Nuance shares. That price tag, however, may rise another $60 million over the next 18 months, depending on how well Nuance's new business performs. Focus comes a bit cheaper, at $58 million in cash. But in addition to the prices paid for the businesses per se, Nuance will ante up 501,530 shares of restricted stock and 750,000 stock options to cement the loyalty of BeVocal's 145 employees, plus another 185,367 shares of restricted stock to induce 61 employees from Focus to stick with Nuance -- 0.8% worth of stock dilution in all.

Finally, a March press release discussing the terms of Nuance's credit facility with Citigroup (NYSE:C), UBS (NYSE:UBS) and Credit Suisse (NYSE:CSR), suggests that the company may take on about $90 million in additional debt to pay for its new prizes.

What management does:
Let's hope these new prizes bring with them good margins on their revenue streams -- because Nuance could use them. Its rolling gross margin has fallen for three straight quarters, although as the firm gains scale, its operating margins are rising and its net loss shrinking.





























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:
Motley Fool Hidden Gems staffer TMF Platoish summarized last quarter's results as "solid" and sees "numerous" opportunities visible in the future. Speaking of the future, he also expects to see Nuance post a GAAP loss tomorrow, but positive cash flow. That tallies with management's own assessment, which calls for $130.5 million to $134.5 million in revenue, a loss of $0.01 to $0.02 per share, and "pro forma" earnings of $0.11 to $0.12 -- so when you read above that analysts predict $0.11 per share, you know it's pro forma earnings they're talking about. For the year, management predicts revenues of $555 million to $570 million.

TMF Platoish also makes the perhaps audacious statement that as it continues to grow, adding new customers such as Garmin (NASDAQ:GRMN) and Toyota (NYSE:TM) along the way, Nuance may one day grow to be the largest, most valuable member in our Hidden Gems portfolio. But doing so would require a market cap of $5 billion, minimum. Is he right, or do we have even more likely winners within our stable of companies? Take a free trial of the service, check out our portfolio, and decide for yourself.

What did we expect out of Nuance last quarter, and what did we get? Find out in:

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