Nuance Communications: Depressed Valuation Implies Greater Threat Of Technological Change

| About: Nuance Communications, (NUAN)

Shares of Nuance Communications (NUAN) lost roughly 2% of their value over the past trading week. The provider of voice and language solutions reported its fourth quarter results on Monday after the close.

Fourth Quarter Results
Nuance Communications reported fourth quarter revenues of $468.8 million, up 27.7% on the year before. Revenues including lost revenues related to accounting treatments of acquisitions came in at $490.1 million, below analysts expectations of $497.5 million.

The company reported GAAP net income of $117.6 million during the quarter, which compares to a loss of $5.1 million last year. Earnings per diluted share came in at $0.36 per share, compared to a loss of two cents last year. Non-GAAP income rose to $164.9 million, or $0.51 per diluted share. Non-GAAP earnings beat analysts consensus of $0.48 per share. Non-GAAP operating margins rose 110 basis points to 37.2%.

CFO Tom Beadoin commented on the results:

In fiscal 2012, Nuance delivered its strongest year ever, led by 25% revenue growth and 32% operating cash flow growth. Design wins and partnerships with global leaders such as Cerner, Intel and Samsung are extending Nuance technology into new solution and expanding our addressable markets.

Detailed Information


Revenues for the healthcare business came in at $189.3 million, up 33.6% on the year before. The unit reported strong new bookings including new contracts from Beaumont, Providence Healthcare, US Army Medical Command and the Veterans Health Administration.

Mobile & Consumer

Revenues for the mobile and consumer business rose 32.7% to $143.2 million during the quarter. Nuance booked new customers including Acer, Amazon, Audi, Ford, Intel and Samsung, among others.


Revenues in the enterprise division rose 11.5% to $89.1 million on a GAAP basis. The division reported growth on new contracts from Geico, Citigroup, Cigna and Telstra.


Revenues for the imaging business rose 25.5% to $47.2 million on a GAAP basis, on new contracts from, Canon, Deloitte and EMC.


For the first quarter of its fiscal 2013, Nuance Communications guides for quarterly revenues of $484 to $500 million, ahead of analysts expectations of $472 million. Guided earning per share of $0.33-$0.37 per share, fall short of the consensus estimates of $0.41 per share.

Nuance Communications guides for full year revenues of $2.17-$2.22 billion, ahead of consensus estimates of $2.04 billion. Annual guided earnings per share of $1.84-$1.94 came in ahead of analysts consensus of $1.84 per share.


Nuance Communications ended its fiscal 2012 with $1.13 billion in cash and equivalents. The company operates with roughly $2.12 billion in short and long term debt and convertible debentures, for a net debt position of roughly $1 billion.

For its fiscal 2012, Nuance generated annual revenues of $1.65 billion. The company net earned $207.1 million, or $0.65 per diluted share.

The market currently values Nuance Communications at $6.4 billion. This values the firm at 3.9 times 2012s annual revenues and 30-31 times annual earnings. Shares trade at 2.9 times annual revenues and merely 11 times next year's earnings.

Nuance currently does not pay a dividend.

Some Historical Perspective

Year to date, shares of Nuance Communications have fallen roughly 18%. Shares started the year around $25 per share in January and swiftly rose to $30 in February of this year. Shares fell to lows of $20 in June after the company closed the acquisition of Transcend Services. Shares rose back to $25 in September of this year, currently exchanging hands around $21 per share.

Language services are hot, thereby benefiting long term shareholders in Nuance Communications. Shares rose from lows of $4 in 2005 and swiftly rose to $20 in 2007. Shares fell back to lows of $8 during the financial crisis after which shares rose to all-time highs of $30 in the beginning of 2012. Between its fiscal 2009 and 2012, Nuance boosted revenues by approximately 75% to $1.65 billion. The company reported a modest loss of $19.4 million in 2009, followed by a $207.1 million profit this year.

Investment Thesis

Nuance's fourth quarter was decent, accompanied by a strong outlook for its fiscal 2013. Despite the strong revenue growth, and even stronger earnings growth, the valuation seems very appealing at just 11 times 2013s guided annual earnings.

There has been a lot of debate regarding the company's future fate. Some commentators argue that a large player like Google (GOOG) or Apple (AAPL) might make a bid for the company. The former company has announced its intentions in the field of artificial intelligence and develops own speech and translation services. Apple's Siri uses Nuance's technology already. Nuance's current market capitalization, even when including a significant control premium, is very modest for these players.

Others point out that Nuance's defense of patents might result in a loss of competitiveness over time. Furthermore, the emergence of other technologies might erode the protection of Nuance's patents. The company boosted its patent portfolio by making acquisitions and lawsuits in recent years.

While Nuance looks very appealing to me at today's valuation, based on its recent growth trajectory, I refrain from investing. It remains too hard for me to make an accurate estimate of the company's fate with regards to future technological developments.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.