Nuance Communications (NUAN, Financial) is an application software company that provides voice and language solutions for businesses and consumers worldwide. The company sells its products through direct sales force and a network of resellers, and its ecommerce website. After the estimate-beating second quarter fiscal 2015 results, the stock attained new highs in 2015, and investors are sitting on year-to-date gains of around 23%. Can the momentum sustain going forward? Let’s take a look at its recently reported quarter and the growth drivers.
Second-quarter fiscal 2015 in focus
The stock has seen a sharp rally after the company posted second-quarter fiscal 2015 results with earnings of $0.30 per share versus $0.28 per share in the prior-year quarter. The analysts were expecting $0.06 per share less. During the quarter, Nuance bought back roughly $120 million worth of shares and this helped in topping analysts’ estimates, despite 0.4% decline in revenues. Consolidated sales came in at $481 million, beating analysts’ expectations by around $7 million.
Few growth catalysts
Nuance is an acquisition hungry company. Over the past four quarters, the company has spent close to $150 million on acquisitions. Despite this, the top-line declined year over year implying that organic growth is falling even faster. Also, Nuance has spent close to $2.35 billion on acquisitions over the past five fiscal years while revenue has grown 72%.
Besides acquisitions, the company also indulges in heavy share buybacks. With the current authorization almost exhausted, the board has granted fresh approval of $500 million that adds on to the balance of $92 million from the previous authorization.
Nuance is working on cost-cutting initiatives with a target to deliver $125 million in expense reductions by the end of fiscal 2016. This will trickle down to the bottom line.
The company is investing in innovative products to drive growth. Nuance recently launched the industry’s first evidence-based computer-assisted reporting solutions for radiologists. “PowerScribe 360 Reporting 3.0 arms the radiology community with new tools to help improve the quality of patient care in volume-driven workflows,” said Karen Holzberger, vice president and general manager, Diagnostics, Nuance Communications.
Also, Nuance’s Dragon TV is set to be built into revamped Roku 3 set-top. “Roku provides an amazing array of media content. Voice makes it simple for consumers to get right to the content they want, quickly and easily,” said Scott Taylor, senior vice president of Mobile Devices, Nuance.
Mobile & Consumer segment revenues account for 25% of Nuance’s total revenue. As the connected car concept is gaining momentum, this will be a significant tailwind for Nuance. The automotive market now leads the segment growth.
Nuance is also shifting investment to cloud offerings and recurring revenue solutions. The company expects that this segment will form a significant portion of revenue from fiscal 2016 and 2017 onward.
Although the revenue was nearly flat year over year, the operating cash flow and deferred revenue have grown. In the second quarter, operating cash flow increased 37.8% to $119.9 million, versus $87.0 million a year ago, while deferred revenue grew 26.3% versus the prior year quarter. This shows that the business is healthier than what the headline numbers indicate.
High debt is a worry
One worrying factor is the massive debt that the company carries on its balance sheet. For example, Nuance long-term debt is at a whopping $2.14 billion versus cash of around 538 million. Going forward, management said that the company will be utilizing cash generated from operations for debt reduction and share buyback. However, with such a high debt, I don’t think the idea of share buyback is a good proposition.
Analysts are optimistic
Analysts are expecting fiscal 2015 earnings to be $1.15, which puts the current stock price at a forward P/E of 15.18. The optimism of analysts is also evident in the EPS revision history as shown below:
| EPS Revisions | Current Qtr. Jun 15 | Next Qtr. Sep 15 | Current Year Sep 15 | Next Year Sep 16 |
| Up Last 7 Days | 0 | 0 | 0 | 1 |
| Up Last 30 Days | 3 | 5 | 10 | 9 |
| Down Last 30 Days | 0 | 0 | 0 | 0 |
| Down Last 90 Days | N/A | N/A | N/A | N/A |
Wrapping up
Nuance delivered estimate-beating second-quarter fiscal 2015 results. The company is slowly switching focus to Cloud-based and recurring revenue business model. Also, the automotive segment with its connected car concept will be a real growth driver. For the next five years, growth is pegged at a CAGR of 20% versus a decline of 3.5% in previous five years. However, high debt on the balance sheet and acquisitions driven growth remains a red flag.
I feel that the company can sustain the growth momentum in the long-run, especially with its plan for international expansion as an additional growth catalyst. All in all, the stock is a good one to buy for long-term gains.
