How Nuance Is Strengthening Its Business From Within

Boxes for Nuance Power PDF products.

In order to use artificial intelligence effectively, communication is essential, and Nuance Communications (NASDAQ: NUAN) has a long history in the area of letting people use natural language to interact with technology. Yet even though the scope of its addressable market is huge, Nuance hasn't lived up to its potential. After expending a lot of effort looking outward to try to find the most lucrative opportunities for growth, the tech company decided to refocus its efforts internally. It knows that in order to sustain its competitive advantage, it needs to use its lead to push forward with groundbreaking technological innovations .

Coming into Wednesday's fiscal third-quarter financial report, Nuance investors were hopeful that the company would be able to take clearer advantage of the potential growth in the industry. Nuance's results gave those investors more optimism about the company's future, and strategic efforts will play a key role in helping Nuance maximize its opportunities going forward.

How Nuance fared

Nuance's fiscal third-quarter results continued to show the somewhat sluggish growth that we've seen lately from the company. Revenue rose 3% to $502.9 million, and on an adjusted basis, sales climbed by just 2%. Similarly, adjusted net income of $79.6 million was less than 1% higher than Nuance saw in the year-earlier quarter, and adjusted earnings of $0.27 per share were flat from last year's fiscal third quarter and were also directly in line with the consensus forecast among those following the stock.

Nuance's business performance showed some signs of improvement. Organic growth of 1% was reasonably encouraging, and recurring revenue as a percentage of total revenue stayed stable at 73%. Even better was the 7% rise in new bookings growth, reaching the $471 million mark.

From a segment perspective, Nuance got the best organic growth rates from its imaging and automotive businesses, with gains of 10% and 9%, respectively. The enterprise business fared reasonably well, posting a 5% year-over-year rise. Only the largest segment, healthcare, saw tepid top-line performance, with organic sales flat from year-earlier levels. From a profitability standpoint, however, the tables were turned, with healthcare and imaging both picking up about 10% higher segment profit. Enterprise saw profits rise just 2%, while automotive suffered about an 8% decline.

Where Nuance is focusing right now

CEO Mark Benjamin pointed to all the changes that Nuance has made internally as starting to bear fruit. The company has made changes to its board of directors and governance, as well as doing portfolio and business reviews. In Benjamin's view, Nuance is "acting with urgency and driving toward a simplified and more efficient business, capable of sustainable, long-term revenue and earnings growth with resources keenly focused on opportunities that leverage Nuance's core strengths in key vertical markets." Investors can expect to see more on that vision in a few months in the company's fiscal fourth-quarter report.

Nuance is also redoubling efforts to treat shareholders well. The company bought back 8.1 million shares of stock during the fiscal third quarter at about $13.81 per share, spending $112 million. It's repurchased an additional 1.1 million shares so far in the current quarter as well, and the board's new repurchase program authorized another $500 million for future buybacks. In addition, Nuance said it will pay back $150 million in debt, resulting in interest cost savings and a healthier balance sheet.

Investors got a tiny bit of good news on the guidance front. Nuance said again it believes new bookings will grow 5% to 7%, and it now expects organic growth for the full year of 3%, the midpoint of its previous range. Adjusted earnings of $1.11 to $1.15 per share marks a $0.02 rise in the bottom end of Nuance's previous range, and adjusted revenue guidance for $2.05 billion to $2.065 billion narrows earlier guidance in a slightly positive manner.

Nuance shareholders were pleased with the overall message from the company, and the stock rose 6% in morning trading on Thursday following the Wednesday evening announcement. With so much potential for future gains, Nuance now looks better poised than ever to find a pathway forward to renewed growth in a promising area of technology.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool recommends Nuance Communications. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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