Canaccord Genuity Remains Positive on Nuance (NUAN); Mobile Handset Business Still Challenging

Canaccord Genuity is maintaining its Buy rating and $20 price target on Nuance Communications (Nasdaq: NUAN) following Q3 results released Monday night.

Analyst Richard Davis noted the following key items:

• Bullish items. Revenue, non-GAAP EPS and bookings each came in above the high-end of guidance; recurring revenue has increased from 52% of the total in F2012 to 64% today; operating cash flow as a percent of non-GAAP net income continues to improve (guided to be ~100% in F2015); introduced new metrics (net new bookings growth and a license revenue breakdown) that will add visibility as F2015 unfolds.
• Bearish items. The mobile handset business continues to face headwinds (vendor consolidation, some pricing), despite decent cloud user and transaction trends; gradual erosion of revenue at the high-end of Healthcare On-Demand market (driven by EMR adoption) will mute segment growth; guided for flat operating margins in F2015 as transition to connected services negatively impacts gross margins.
• The numbers: an upside quarter. Nuance reported Q4/14 non-GAAP revenue and EPS of $520.3M and $0.33, which were respectively $9.5M and $0.06 ahead of consensus. Organic revenue growth was 1% in the quarter and non-GAAP operating margins of 25.9% were up 60 bps y-o-y. F2014 bookings of $2.44B were up 27.4% yo-y, but after normalizing for large and early renewals, net new bookings growth was likely closer to 6% ¡V NUAN will only report this metric going forward, which should serve as a better approximation of normalized, post-transition revenue growth.
• Outlook: not bad, in-line with consensus. We were a bit ahead of the Street and are slightly trimming estimates. We were pleased to see a continuation of revenue growth (despite the model transition), a continued commitment to cost controls (i.e. flat to slightly improved operating margins), and 6-8% net new bookings growth. Segment wise, we believe growth should be more uniform than years past, led by Healthcare.

For an analyst ratings summary and ratings history on Nuance Communications click here. For more ratings news on Nuance Communications click here.

Nuance Communications closed at $15.31 yesterday.

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