Nuance Sounds a Lot Better After Its Latest Earnings Report

Image: Nuance Communications.

For a long time, voice-recognition specialist Nuance Communications hasn't been living up to its full potential in the minds of investors, as the once-promising rollout of products with mass-market appeal hasn't resulted in the company's ubiquitous presence in the fast-growing mobile market. Coming into Thursday afternoon's fiscal second-quarter financial report, Nuance investors weren't sure whether the company's successes in other areas would lead to overall growth.

The reality was a lot brighter, though, with solid gains that should give long-term shareholders greater confidence in the company's future. Let's take a closer look at Nuance, and how the company has done recently.

Nuance talks a good gameThe fact that investors were excited about Nuance's overall results says more about the low expectations they had than any huge progress on Nuance's part. Adjusted revenue actually fell slightly, to $488.1 million, but that was better than the expected 2% loss, to $481 million, that most investors in the company had expected.

Similarly, after making modifications, adjusted net income gained 12%, to $98.9 million, resulting in earnings of $0.30 on an adjusted basis. Not only was that $0.25 above the consensus estimate, it also resulted in year-over-year earnings growth -- something investors hadn't expected to see.

As we've regularly seen, Nuance has had varying degrees of success from various segments. This quarter, though, the Mobile and Consumer business stood out from the crowd, with organic growth of 9% helping to push sales up to $116.7 million. But declines in the key Healthcare segment, which brings in almost half of Nuance's total revenue, weighed on the overall results, and 7% declines in the Enterprise and Imaging divisions pointed to substantial weakness. Still, gains of about 6% in Imaging, which came from acquisition activity, were important, as the segment has the highest profit margin of any of Nuance's four main divisions.

Nuance's transformation toward greater recurring revenue continues to run its course, albeit more slowly. Recurring revenue rose about half a percent for the quarter, while perpetual license revenue rose a roughly proportional amount, keeping the split at around two-thirds to one-third in favor of recurring revenue. Net bookings fell due to the loss of a one-time item last year and ongoing currency issues.

Image: Nuance.

Nuance's CFO Tom Beaudoin seemed pleased with the results. "Nuance delivered second-quarter revenue and EPS that exceeded our guidance," Beaudoin said, and "Our improved EPS, operating margin, and operating cash flow reflect the results of our continuing efficiency and cost control initiatives."

Can Nuance keep climbing higher?Perhaps an even bigger sign of Nuance's confidence came from the announcement of a massive share repurchase program. Nuance said that it would authorize an additional $500 million under its repurchase plan, adding more fuel to the efforts that have really taken off since the plan began in early 2013. During the current quarter, Nuance spent $120.3 million buying back about 8.56 million shares, and the more than 25 million shares that Nuance has bought back in the past two years represents almost 8% of the company's overall share count.

Unfortunately, though, buybacks haven't really resulted in lasting gains for the stock. Shares posted solid gains in the middle of last year, but they gave way to further declines toward the end of the year. Clearly, investors want to see more than financial impacts to drive growth, and are looking for confirmation of the success of the company's overall business strategy.

Nuance investors were generally pleased with the results, as Nuance shares rose by more than 1% in the first hour of after-market trading following the announcement. Still, the somewhat muted response only highlights the skepticism that at least some investors have toward the company. Shareholders want more from Nuance in terms of making good on its growth promise before they'll be willing to put the loss of the mobile-device opportunity behind them, and get back to the business of making money in whatever niches work best for Nuance.

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Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Nuance Communications. The Motley Fool owns shares of Apple and 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.

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