Summary
- Nuance's spin-off of its Automotive unit, Cerence, has seen mixed reactions. Nuance was down ~15% on the day of the spin-off completion.
- The Cerence spinoff will create greater shareholder value. Cerence's vision to enter autonomous driving and smart cities will be executed by a strong leadership team.
- Microsoft has recently partnered with Nuance, which shows the tech giant's deep commitment to the healthcare sector.
- We believe that the Cerence spinoff and Microsoft partnership will serve as the catalysts for the stock going forward.
Overview
October 2019 has been a busy month for Nuance Communications, Inc. (NASDAQ: NUAN). At the beginning of the month, the company announced the spin-off completion of its Cerence (NASDAQ:CRNC) business unit. As a result, the companies have now become two independent publicly-traded companies, wherein for eight shares of Nuance, shareholders now also have one share of Cerence. Later on in the second week of the month, Nuance and Microsoft (MSFT) announced that they would join forces in speeding up the provision of clinical information technology ((ACI)) to aid the production of clinical information.
Financials
In Q3, Nuance reported a Non-GAAP EPS of $0.31, which beats the estimate by $0.03. Its GAAP EPS of $0.04 also beats the estimate by $0.02. Having posted an overall revenue of $460.2 million means the company increased its top-line growth by 1.9% YoY to beat the guidance by $4.75 million.
Based on the ASC 605 reporting standard, we saw that Hosting and professional services segment increased by 6% to $260.9 million, driven by an overall increase across Healthcare, Enterprise, and Automotive segments. Product and licensing was down 4% to $121.8 million, primarily due to a decrease in Enterprise and Automotive, which was offset a little bit by an increase in Healthcare. The Enterprise segment of Product and licensing experienced the largest decrease, which was due to the lower revenue from the contact center clients. Maintenance and Support was also down by 1.6% to $66.5 million, driven by the customers’ shift from licenses to cloud-based solution in the Healthcare segment.
(source: Nuance 10-Q)
With the spin-off of Cerence, Nuance will no longer recognize the revenue from its Automotive segment. As of June 30, 2019, Automotive revenue segment contributes ~16% of the total segment revenue based on the new ASC 606 reporting standard. Overall, the company’s strong expense management was the Q3 highlight. Operating income almost tripled to $38.5 million while net income was up to $88.9 million from $64 million in FY 2018.
