A Closer Look at This Software Company's Recent Results

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Nuance Communications (NASDAQ: NUAN) specializes in speech recognition. This software company has defended its market by purchasing smaller rivals. Nuance can't buy MicrosoftGoogle, or IBM (NYSE: IBM) though, so competition remains a risk factor. Nuance also reported weak results for the fiscal second quarter of 2013. Surprisingly, these results may help make the bull case for Nuance.

Latest Results

Nuance admitted that its second quarter went poorly. The voice recognition company achieved 15.9% higher GAAP sales because of its recent acquisitions, but it also reported -5% organic sales growth. Nuance also provided organic sales growth figures for the last six quarters, which show that 2013 hasn't been a good year so far. Nuance's organic sales growth for the first quarter of 2013 came in at 8%. The company achieved 12% annual organic sales growth in fiscal 2012.

Nuance pointed out three main problems. The company's recent acquisitions and sales force didn't produce the results it expected. The third problem might not be a problem at all in the long run. Product and licensing sales shrank from 48% of revenue in the second quarter of 2012 to 41% of revenue in the second quarter of 2013, while on-demand sales rose from 27% to 34% of revenue. Customers who bought software packages from Nuance in the past may have become service buyers instead. Nuance's recent sales weakness may actually indicate more reliable future revenue.

Mobile Phones

Nuance CEO Paul Ricci answered a frequently asked question about a major customer in a recent conference speech. Arik Hesseldahl, at AllThingsD, reported that Ricci finally admitted Nuance created the speech recognition software for Apple's (NASDAQ: AAPL) Siri. Nuance's second quarter earnings announcement mentioned new business or design wins from multiple companies, including Apple, so Nuance's voice recognition software could keep showing up in future Apple products as well.

Nuance also has deals with some of Apple's competitors. The Nuance second quarter earnings announcement mentions deals with BlackberrySamsungLG, and other mobile phone makers. Customer diversification makes Nuance look like a safer investment. This company doesn't just sell software for smartphones, either. Nuance's largest business segment provides health care software.

Health Care

Nuance helps make doctors' jobs easier. The company provides voice recognition software that helps physicians create electronic health records. Efficiency gains could help physicians earn more money. Ken Terry, at InformationWeek, reported that Nuance had more customers than competitor Dolbey or M*Modal.

Nuance recently improved its medical software, as well. Michele Masterson, at Speech Technology Magazine, explained that physicians have become less satisfied with electronic health care records systems recently, so Nuance updated its Dragon Medical Practice software to address the physicians' concerns.

A Nuance partnership with IBM could also result in useful health care software. After IBM's Watson computer achieved victory on the quiz show Jeopardy, Big Blue put Watson to work in the medical field. In February 2011, IBM announced a partnership with Nuance that would use both Watson and Nuance's voice recognition software to improve health care. In its second quarter 2013 report, Nuance mentioned that it's working with an unnamed partner that has strengths in semantic processing and natural language.

The health care analytics market could be big enough to move the numbers for IBM. IBM has trailing revenue of $103 billion. Denise Amrich, for ZDNet Health, reported that a Markets and Markets projection estimates that health care analytics will be a $10.8 billion market in 2017.

Valuation

Nuance's mention of new work from Apple may also mean that Apple has new products on the way, but Apple isn't priced like a growth stock. Apple has a forward P/E of 10 and a forward yield of 2.8%. IBM has a forward P/E of 11 and a forward yield of 1.9%, which makes Apple look like a better deal. Nuance has a forward P/E of 12 and offers no dividend, but this comparison actually makes Nuance look reasonably priced.

Nuance has a forward P/E that's only a bit higher than these two large cap tech stocks, and one of these stocks is frequently considered undervalued. Nuance may have been expensive in the past, but that isn't the case in 2013. 

Takeaway

The Dragon software maker's weak recent results could actually indicate an opportunity. Nuance may have given up immediate profits to gain steadier future income. Partnerships with IBM and Apple also show promise for Nuance. Carl Icahn's decision to buy this stock may be the right move.

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Eric Novinson has no position in any stocks mentioned. The Motley Fool recommends Apple, Google, and Nuance Communications. The Motley Fool owns shares of Apple, Google, International Business Machines., Microsoft, and Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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