E Nuance: A Powerhouse Mean Reversion Buy

Nuance Communications (NUAN) is a really interesting technology company that we believe is ripe for a mean reversion trade. We really like the prospects of this company, particularly in its Dragon Drive offering, however the Street has growth concerns. We believe the issues with growth stem from the company streamlining and transitioning its business lines, and these impacts will be recognized later in 2018. It is our thesis that shares will rebound well ahead of this time, led by advances of Dragon Drive in multiple sectors.

Source: Nuance Communications

Take a look at the table below summarizing fiscal year 2017, which summarizes the yer-over-year growth in segment revenues:

Source: SEC Filings data, graphics by Quad7Capital

As you can see, revenues have been volatile. After a disappointing year, the stock suffered, only to rebound in Q1. Q1 performance wise was a higher quarter than each of the quarters in the last fiscal year. The enterprise segment also continues to be a positive segment for the company, with continued revenue increases. The numbers will look slightly different in the future, when automotive is broken out from mobile into a separate segment. The remaining mobile will be combined with enterprise.

So what happened here in Q2? Well GAAP revenue of $514.2 million, wasup 3% compared to $499.6 million a year ago, with 71% of total GAAP revenue as recurring revenue, compared to 74% a year ago. Thanks to a goodwill impairment of $137.9 million in the quarter related to two businesses, Subscriber Revenue Services and Devices, GAAP net loss of was $164.1 million, or $0.56 per share, compared to a loss of $33.8 million, or $0.12 per share, in the second quarter of fiscal year 2017. Ouch. What about on an adjusted basis?

Well adjusted revenue of $518.3 million was up 1%, compared to $511.1 million in the second quarter of fiscal year 2017. This may seem like low growth, and it is, but surpassed expectations. Organic revenue growth was 1% compared to the prior year, led by 8% growth in Healthcare and 12% growth in Automotive. (Recall the company is now reporting in 5 segments).

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Disclosure: No current position

Quad 7 Capital is a leading contributor with various financial outlets, and pioneer of the BAD BEAT Investing philosophy. If you like the material and want to see ...

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