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Over the past several years, Nuance Communications (NASDAQ:NUAN) has been a rumored acquisition target by several large tech companies, including Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL). Up until this past year, Nuance has seen pretty explosive growth in both revenues and profits, with revenue going from $868.5 million in 2008 to $1.65 billion in 2012 and net income going from a loss of 30.1 million in 2008 to a profit of 207.1 million in 2012. But fiscal year 2013 has been quite a disappointment for the company through the first 3 quarters. While revenues have still grown, profit margin has dramatically declined and the company has been busy cutting its own profit estimates since the investor meeting in December 2012. In the Q2 conference call, CEO Ricci said that healthcare transcription volumes were down more than expected and that there were some "execution" issues. On the Q3 call, after cutting Q4 EPS estimates to $0.24-$0.32 versus the analyst consensus estimate of $0.38, Ricci stated that the company was holding off on some deals to maintain pricing discipline and that the transition to "recurring" revenues would be a slow transition. While this dramatic decline in profits is frustrating to investors as the stock price languishes, I found myself wondering how so much money is being spent on R&D and Nuance's cloud infrastructure without a clear picture on how Nuance will see a return on its investment.

At the 2012 Investor Meeting last December, Nuance laid out 3 key investments it was making, beyond its healthcare franchise: Biometrics, cloud infrastructure to support smart TV's and connected cars, and "Wintermute". The company has provided additional color and design wins for biometrics, smart TV's and connected cars, but not much has been said about Wintermute. Wintermute is a virtual assistant that would be able to span multiple devices and manufacturers. Being that Nuance technology powers Apple's "Siri" function, it seems odd that Nuance would spend heavily to create a competitor to a key customer product. My guess is that a specific social networking company with 1.15 billion MAU's approached Nuance about developing a customizable virtual assistant that could be integrated into each user's profile and used in almost every medium in today's connected world. But why would a social networking company, such as Facebook (NASDAQ:FB), be interested in either purchasing Nuance or integrating Wintermute into user profiles?

Wintermute would allow Facebook users to essentially create a personal assistant that would interact with them in almost every facet of their day. While making the daily commute to work, a user could use their voice biometrics to unlock their phone and sign into their Facebook account, send updates and have friends updates read to them through their Bluetooth while starting their car, order a breakfast or coffee from a local restaurant so that it was ready for pickup and simultaneous payment as they arrived, or be able to use their virtual assistant to update their work calendar and send emails through voice commands when caught in a traffic jam. Once at work, through a Facebook profile, a user could utilize one personalized intelligent assistant with Nuance's Natural Language Understanding (NLU) no matter whether Apple, Samsung, Google, Microsoft or any other product is used. After work, a user could utilize their personal assistant to make a dinner reservation while driving home. Once at home and ready to settle on the couch, a user could power up their smart TV and stay connected to all their friends while watching TV.

So if Facebook really did purchase Nuance, how would Wintermute be monetized? In addition to making a Facebook profile become an integral part of a users day, Facebook would be able to monetize Wintermute by using Nuance voice ads. Instead of traditional radio ads that target the general audience or a particular radio station, Facebook would be able to integrate the Nuance cloud and Facebook user profile to specifically target voice ads to applicable users. This would mean that while listening to Pandora (NYSE:P), a voice ad could ask a driver whose profile notes that they are an avid Do It Yourselfer, that Home Depot (NYSE:HD) is currently offering a discount to the first 100 listeners who respond. The user would then be able to respond to the voice ad, and possibly have a conversation with the ad to have a product or demonstration ready for them when they arrive. This same concept for voice ads in the car could also be applied to Facebook users while watching a Smart TV.

Recent announcements to back my theory of a possible Nuance acquisition or partnership include:

  1. Facebook payments announcement
  2. Facebook acquisition of "Mobile Technologies" developer of speech translation app Jibbigo
  3. Facebook integration deals with OpenTable and Rovi
  4. Facebook has a brand new 5 year 6.5 billion credit line to go along with net cash position of 8.8 billion.
  5. Nuance announcement of poison pill if any shareholder (Carl Icahn) acquires more than 20% of common shares.

Given the strong IP position that Nuance has and its variety of business units, it is very difficult to try and examine what a potential purchase price of Nuance would be. My guess is that Nuance would expect a minimum of 5 times sales, which would be approximately 9.25 billion or about $30 per share. Even if Nuance isn't purchased, its position as a neutral party (i.e.- Switzerland effect) with a leading position in Natural Language Understanding, will lead to handsome returns as the personal assistant technology wars heat up.

Source: Is Facebook The Reason Apple Hasn't Purchased Nuance?

Additional disclosure: May purchase additional shares of NUAN.