Does Nuance Communications Inc. (NUAN) Really Deserve to be Left for Dead?

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The results are in for Nuance Communications Inc. (NASDAQ:NUAN) , and boy, does the market hate them. The company is down 19% today after reporting a sequential decline in revenue and a steep drop in net income. Three analysts -- at Needham, Craig-Hallum, and Stifel Nicoulas -- have all downgraded Nuance in the wake of its earnings miss and soft guidance. Does that mean it's time to run for the hills? Perhaps not. Let's dig deeper to find out what went wrong today, and whether this weakness is real, or if Wall Street is just hearing voices in its head today.

Nuance Communications Inc. (NASDAQ:NUAN)What the numbers tell you The chart below contains GAAP numbers throughout, but on an adjusted basis, Nuance looks a bit better this quarter. In its fiscal first quarter, Nuance posted non-GAAP revenue of $492.4 million and adjusted earnings per share of $0.35. The discrepancy between its GAAP revenue of $462.3 million and the adjusted result is due to the accounting treatment of acquisitions. Despite that difference, Nuance easily surpassed its year-ago result. A steep GAAP net income loss translates to a $113 million positive result on an adjusted basis, a slight decrease from last quarter's GAAP result of $118 million, and in line with the growth in free cash flow from the year-ago quarter:

Sources: Morningstar  and company earnings report.

What does it mean for the future? Nuance breaks out its segments as follows:

Segment Year-Ago Quarterly Revenue Fiscal First Quarter Revenue Year-over-Year Change
Health care $145.3 million $217.4 million 49.6%
Mobile & Consumer $108.5 million $131.7 million 21.4%
Enterprise $75.8 million $83.7 million 10.4%
Imaging $52.4 million $59.6 million 13.7%

Source: Nuance earnings report. Numbers are in adjusted (non-GAAP) terms.

It's clear that health care is both Nuance's biggest moneymaker and its fastest-growing segment. There may be a ceiling on how much more Nuance can grow its mobile and consumer segment, since the company already counts both Apple Inc. (NASDAQ:AAPL) and Samsung as customers. Speech recognition for consumers is becoming an increasingly crowded field, and despite Nuance's leadership position, it could still find itself undermined by lower-cost alternatives such as AT&T Inc. (NYSE:T)'s Watson platform, which is open to developers and could enjoy the sort of crowdsourced innovation Nuance's closed system lacks. There is still a great deal of upside in medical applications, however, as many hospitals have been slow to adopt the latest technology. Perhaps Nuance could partner with iRobot Corporation (NASDAQ:IRBT) , which is in the process of rolling out its new medical robot to hospitals around the world. The last thing you'd want is a semi-autonomous robot misunderstanding you in a place full of injured and sickly people.

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