SWOT's Up With Nuance?

AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Nuance Communications (NASDAQ: NUAN) is a stock I used to own but like other Apple (NASDAQ: AAPL) related names it didn’t seem to benefit from any Apple good news. Nuance is the company responsible for the Siri Voice on the Apple iPhone 4s and later models. It’s also on Android and in many handsfree voice applications in later model autos. It never was just an Apple play. 

With such an intriguing name in a future-forward technology a Strength, Weakness, Opportunities and Threats analysis is in order.

STRENGTHS

  • The company is the leader in speech recognition software. It operates in four segments: Healthcare, Mobile and Consumer, Imaging, and Enterprise. Of these four the revenues in healthcare and mobile were up the most, 27.6% and 28.2% respectively, as reported in the Q4 earnings report on November 19. Doctors are really taking to the Dragon Medical program to dictate notes, over 150,000 doctors as well as more than 3,000 hospitals. (Fewer doctor handwriting translation problems equals fewer lawsuits.)
  • Revenues were up double digits in the other three categories with new big client wins in all four categories: Amazon, Canon, Geico, Audi, Ford, Cigna, Citigroup, Samsung, Intel, Deloitte, EMC, BMW, and the Veterans Health System among many more.
  • Earlier this year it acquired Transcend Services, a transcription company that should help boost medical revenues even higher, adding up to $150 million next year.
  • Siri is likely to be added to many more Apple products over the years. Siri was the most contributory feature to the the popularity of the iPhone4s. And remember, Apple spent a great deal of money on advertisements featuring Siri. At the CES show last summer Nuance debuted a speech recognition TV app (no more remotes, yay!) that will also probably be added to future TVs.
  • Despite disappointing on revenue expectations ($490 million instead of an expected $498 million) on the Q4 call but beating on EPS ($0.51 per share beat an expected $0.48), UBS and Mizuho analysts reiterated Buys and UBS raised its price target to $30.

WEAKNESSES

  • The current P/E stands at 150.96 but this weakness is expected to become a strength as the forward P/E drops to 11.91.
  • Another weakness that could be considered a strength is the research and development budget grew by a third over the last year.
  • The company‘s payment relationship with Apple is unclear as to whether Nuance is paid fixed licensing fees or any percentage on iPhone sales (much less likely). This lack of clarity is the reason the name doesn’t move on Apple news.
  • Mergers and acquisition costs in the future will hang heavy over the name as it just took a charge for the Transcend acquisition on those Q4 numbers. Mizuho analyst Joanna Markis lowered her price target on the name (though still calling it a Buy) due to the increased debt level in Nuance.

OPPORTUNITIES

  • The newest game changer for Nuance isn’t Siri, it’s Nina, a voice biometric recognition system that will change banking and buying as customers merely speak and no more passwords or mother’s maiden name necessary. Fellow Fool Tamara Rutter mentioned that USAA is one of the first companies to start using the Nina technology. A myriad of applications for Nina is definitely in the works as this voice enabled security is much more difficult to breach.
  • Nuance is headquartered in Burlington MA not far from the smartypants college capital of the US in Boston with Harvard, MIT, Boston University and major medical schools. Some of this talent could be put to work at Nuance.
  • Nuance has sales reps in 70 countries now and that could easily be ratcheted up especially in the medical and mobile segments.

THREATS

  • Competition is its biggest threat. Customer Amazon.com (NASDAQ: AMZN) very quietly bought rival Yap, a pioneer in voice to text software, in 2011. So far, there’s little news about what Amazon intends to do with Yap but most likely it is related to the phone based Kindle app or a future iteration of the Fire.
  • Patent protection is a serious concern as the company will have to pursue suits against imitators in the future.
  • Disruptive and improved technology compared to that of Nuance will always be a concern as tech titans like Microsoft and Google may try to do Nuance one better and have the money to do it.
  • Nuance has a number of government contracts and with any decrease in spending, cuts are always a possibility. As these are mostly medical contracts it shouldn’t be too concerning but when the government is involved you never know.

 

The company is holding a Financial Analyst Day on December 6 and if this company interests you that webcast is a must-hear. Overall, Nuance is still an interesting name and it's going to be ubiquitous soon in cars, on phones, at your doctor’s office, and soon at your bank. It’s had a major pullback from the $31 level in February trading around $20 today but the increasing adoption of Dragon and Siri and Nina and Nuance’s big clients should protect the share price for some time. It's not that well known a name still, and I think it's just beginning to get in the game.


leglamp has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Amazon.com. Motley Fool newsletter services recommend Apple, Amazon.com, 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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