Not So Subtle Nuance
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
When a company creates a solution that makes people's lives easier, and allows them to be more productive, it's usually a boon for shareholders. In a recent Motley Fool article by John Reeves and David Meier, they identified multiple “...Potential Multibaggers For The Watchlist.” One company they mentioned was Nuance Communications (NASDAQ: NUAN). In their eyes, the driving force behind Nuance is voice recognition. It is faster and easier than typing on a keyboard, and thus will continue to grow as mobile computing moves further toward voice commands.
iOS and Headline Earnings
As confirmation that voice commands are the future of mobile, Apple (NASDAQ: AAPL) reportedly uses Nuance for their Siri voice recognition solution. With over 35 million iPhones sold in the last quarter alone, and Siri coming to the two most recent generations of iPads in the fall, Nuance is about to get much busier. The fact that iOS will allow users to not only ask questions and search the web, but also open and close apps and execute other commands, means Nuance should see an increase in the usage of their services. Clearly Nuance is benefiting from this trend in voice computing and this shift can be seen in Nuance's most recent earnings report in particular. In their last earnings report, the company grew revenues by over 25% and EPS by over 34%. The company saw good organic growth in all four of their major product categories.
Four Divisions, All Growing
In the Healthcare division, Nuance offers solutions to this regulated field by offering voice solutions that also allow patient records to be kept confidential. In this division, the company saw organic growth of 14%, and total revenue growth of nearly 24%. Mobile & Consumer saw significant organic growth of 17% with key customers such as AT&T (NYSE: T) and Verizon (NYSE: VZ) deploying the company's voice recognition software to improve their business and speed productivity. You can see part of these productivity gains in the fact that just a few years ago AT&T and Verizon were both only expected to grow EPS by mid-single digits. Today AT&T is expected to grow EPS by over 9.5% and Verizon is expected to see EPS growth of nearly 11%. With the two largest carriers in wireless as major customers for Nuance, you can see the company is the clear leader in voice recognition for mobile.
The company also saw significant growth in Enterprise with organic growth of 18% and total revenue growth of 23.5%. With key customers like Comcast and Time Warner, you can see that many of the Fortune 500 companies deal with Nuance technologies. Last but not least, the company's Imaging division saw organic growth of about 7%, with total revenue up 41.6% on the back of recent acquisitions. All of this organic growth is showing up on the company's financial statements as well.
Financials
In this last quarter, Nuance generated over $88 million in free cash flow, and cash on the balance sheet more than doubled to $966 million. Additionally, its gross margin increased from 60.75% last year to almost 64% this year. The company is expecting to either get close to or beat earnings estimates for the third quarter and the full year as well.
Outlook
Specifically, the company expects third quarter revenues of $430 to $447 million which is in the range of analyst estimates of $439 million. Earnings per share are expected to be $0.38 to $0.41 which could leave the company a little light as analysts are calling for EPS of $0.40. For the full year, the company is forcasting numbers in the middle of analyst estimates with $1.72 - $1.758 billion in revenue and EPS of $1.61 to $1.67.
Conclusion:
Amazingly even if the company only hit the low end of its guidance, the stock currently sells for just 13.76 times the lowest 2012 guidance. For a company expected to see over 16.6% earnings growth, this seems cheap. When you consider that computers have moved from mouse and keyboard, to touch interfaces, it seems natural that voice technology would be the next logical step. Nuance is at the forefront of this movement, is already contracted with some of the most successful technology companies and sells for less than its growth rate. Let me voice my opinion and say this sounds like a good entry point for investors.
MHenage owns shares of Apple and Verizon Communications. The Motley Fool owns shares of Apple and Nuance Communications. Motley Fool newsletter services recommend Apple 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.If you have questions about this post or the Fool’s blog network, click here for information.
