Speech-solutions company Nuance Communications
In the Motley Fool Hidden Gems selection's non-GAAP presentation, the top line raced ahead to $209 million, and net income came in at $38.8 million, or $0.18 per diluted share. Keeping all of the costs and adjustments figured in, though, GAAP revenue was $195 million for the quarter, and the bottom line was actually in the red by $15.4 million, or a loss of $0.08 per share.
Operationally, Nuance continues to perform exceptionally and is backing up management's optimism with strong results and continued growth. For instance, revenues for its enterprise network speech business were $67.3 million in the quarter, a figure that represents 24% organic growth (factoring out the impact of recent acquisitions) year over year, boosted by top-tier customers such as AT&T
Revenues in the rapidly growing mobile and embedded speech solutions division grew 26% organically to more than $43 million, as Nuance finds its way into more and more products from companies such as Ford
But Nuance is paying for this rapid growth with debt and dilution. The cost of leverage at Nuance is steep -- the company pays more than $10 million per quarter in cash interest expenses on nearly $900 million in debt. And in this quarter, net interest expense was about $1 million more than planned, because the Federal Reserve rate cuts dropped interest income from deposits on Nuance's cash balance. The company expects net interest costs to be back in the range of $10 million to $10.5 million in the coming quarter, though, as its LIBOR-tied term loan adjusts to its benefit.
Combine the debt expenses with significant stock dilution caused by secondary offerings and employee incentives, and you've got a sizeable drag on shareholder value that shows in the GAAP numbers.
But Nuance is dramatically growing its revenue base and cementing its lead across numerous lucrative markets. Though leverage and dilution always add risk, Nuance appears to be shrewdly using both tools to put it in a winning position over the long term.
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Fool contributor Dave Mock aspires to wear a red rubber nose and be shot from a cannon someday. He owns shares of Motorola and is the author of The Qualcomm Equation. Nuance is a Hidden Gems recommendation. The Fool's disclosure policy completes you.