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Nuance (NUAN) Surpasses Q1 Earnings Estimates, Shares Up

Zacks Equity Research

Shares of Nuance Communications NUAN gained 3.1% to close at $16.77 on Feb 8 following the announcement of its first-quarter fiscal 2019 results.

The company reported adjusted earnings of 33 cents per share, which beat the Zacks Consensus Estimate of 29 cents. Under ASC 605, the figure came in at 30 cents per share, which increased 30.4% from the year-ago quarter.
Starting this quarter, Nuance adopted the new revenue recognition accounting standard, ASC 606. The comparisons with the year-ago quarter are in compliance with ASC 505.

Notably, the stock has returned 4.2% compared with the industry’s rally of 19.3% in the past year.

Top-Line Details

Total revenues of $495.2 million however lagged the Zacks Consensus Estimate of $507 million. Under ASC 605, the figure came at $465.7 million, which increased 2.8% from the year-ago quarter.

The company witnessed robust growth in Dragon Medical Cloud offerings. Outperformance in this segment can be attributed to the company’s effort to expand internationally. Further, strong demand for Nuance’s AI powered Omnichannel customer engagement solutions and services drove the top line.

Hosting & Professional services revenues increased 3.8% year over year (per ASC 605) to $259.6 million (per ASC 606).

Product & Licensing revenues increased 8.5% from the year-ago quarter to $157.9 million However, Maintenance & support revenues declined 5.9% from the year-ago quarter to $76.1 million.

Nuance benefited from new design wins across Automotive, Voice and Security solutions and Enterprise business in the reported quarter.

However, the company witnessed decline in EHR implementation services, back-end transcription services, and the continued wind down of devices and SRS businesses.

Nuance completed the sale of its imaging business in the reported quarter for $400 million. The proceeds from the sale will be used to pay off the company’s huge debts. Further, Nuance expects to complete the spin-off of its Automotive business in 2019.

Nuance Communications, Inc. Price, Consensus and EPS Surprise

Nuance Communications, Inc. Price, Consensus and EPS Surprise | Nuance Communications, Inc. Quote

Operating Details

Nuance reported non-GAAP gross profit of $299.3 million (ASC 606). Under ASC 605, the figure was $290.9 million, which increased 9% from the year-ago quarter.

Non-GAAP gross margin (under ASC 605) increased 360 bps to 62.5%. The increase in gross margin was driven by the company’s shift from professional services revenues toward higher margin cloud in-license revenues.

The company recorded total operating expenses of $230.6 million, down 2.5% year over year. While research & development expenses increased, sales & marketing and general & administrative expenses declined in the reported quarter.  

Nuance reported non-GAAP operating income of $142.8 million. Under ASC 605, the figure was $132.9 million, which declined 22.6% from the year-ago quarter. Non-GAAP operating margin (under ASC 605) increased 460 bps to 28.5%. The outperformance can be attributed to the company’s operational efficiency coupled with robust gross margin.

Balance Sheet & Other Details

As of Dec 31, 2018, Nuance had cash and cash equivalents of 293.3 million (ASC 606) compared with $315.9 million (ASC 605) as of Sep 30, 2018. The company exited the quarter with total debt of $2.19 billion compared with $2.18 billion at the end of the previous quarter.

Moreover, the company repurchased around 4.9 million shares worth approximately $75.2 million. Notably, Nuance has $466 million available under its share repurchases program.

Guidance

For second quarter fiscal 2019, the company expects non-GAAP continuing operations revenues between $439 million and $453 million and non-GAAP earnings per share in the range of 24 and 27 cents.

For 2019, Nuance expects revenues in the range of $1.85 and $1.89 billion. Non-GAAP earnings per share are projected to be between $1.10 and $1.18.

The company reiterated its original guidance for its Enterprise business. Healthcare segment margin is expected to be in a range of 34-36%.

Nuance now expects gross margin to be 62%, down 1% from its earlier guidance of 63%. This reduction is primarily due to the loss of imaging license and maintenance revenues.

The company increased operating margin guidance range to 26- 26.5%, up 25 bps from the earlier guidance.

Cash flow from operations is expected to be in the range of $380 million to $425 million.

Zacks Rank and Stocks to Consider

Nuance currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same sector include Jabil, Inc. JBL, MeetMe, Inc. MEET and Twilio Inc. TWLO. All the three stocks sport a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks Rank #1 stocks here.

Long-term earnings growth rate for Jabil, MeetMe and Twilio is projected to be 12%, 20% and 9%, respectively.

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