Why Nuance Communications, Inc. Rose 15.6% in November

By Asit Sharma Markets Fool.com

What happened

Continue Reading Below

Shares ofNuance Communications, Inc.(NASDAQ: NUAN)climbed 15.6% during the month of November, according to data provided byS&P Global Market Intelligence.

Image source: Getty Images.

So what

An upbeat fiscal fourth-quarter 2016 earnings report issued at mid-month brought a respite to Nuance stock, which has been mired in a price slump since shares hit a three-year peak of $21.45 in early Dec. 2015:

Continue Reading Below

NUAN data by YCharts.

In its earnings filing, Nuance reported a 45% increase in fourth-quarter net new bookings over the comparable prior-year quarter, to $516.9 million. Bookings for the full year rose 4% over 2015.

Revenue, however, continued in a near-flat trend. The company's $506.2 million in fourth-quarter revenue represented an advance of half of 1% over Q4 2015, and full-year revenue of $1.95 billion increased only 1% over the prior year. Still,the organization was able to claim a full-year, 400-basis-point improvement in recurring revenue, to 70% of total revenue.

During management's earnings conference call on Nov. 17, executives pointed to growth in cloud-based services, including its voice biometrics, automotive, healthcare, and mobile offerings as offsets to declining handset licensing sales. As an example of this next generation of revenue streams, management cited "Dragon Medical Advisor," an artificial intelligence software product that analyzes doctors' transcribed case notes in real time and offers advice during documentation.

In a noteworthy development announced alongside its earnings release, Nuance disclosed that longtime CEO Paul Ricci will retire in 2018, leaving ample time for a transition to new leadership.

Now what

For fiscal 2017, Nuance has promised a return to organic revenue growth, albeit at the slim margin of 1%. Net new bookings are expected to grow between 2% and 6%.

Recurring revenue as a percentage of the total top line is forecasted to rise to 73% next year. With the benefit of such a high percentage of recurring revenue, the company is also beginning to look ahead to fiscal year 2018. Management conveyed to analysts during the fourth-quarter call that it expects a steady improvement in revenue growth, bookings, and margin trends over the next two years.

As you can gather from the guidance above, Nuance should plod along steadily next year. Its newer voice applications are making up lost ground for a few declining lines of business. However, appreciable growth isn't on the horizon yet.

Even though shares have lost about 30% of their value since December of last year, there's no indication that a strong upside catalyst will emerge soon. Still, the overall business model seems stable, and at a forward price-to-earnings ratio of 9.7, Nuance may be cheap enough for patient investors to consider acquiring a position at some point during 2017.

10 stocks we like better than Nuance Communications
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Nuance Communications wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of Nov. 7, 2016

Asit Sharma has no position in any stocks mentioned. The Motley Fool recommends Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.