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Summary

  • Nuance has introduced a variety of new and impressive products that could drive its business higher.
  • But Nuance could be hurt big time if Apple develops its own speech system and cuts off its relationship with Nuance.
  • Nuance’s management takes home a handsome pay and this could limit its growth.

Voice and language solutions provider, Nuance Communications (NASDAQ:NUAN), has seen some good times this year with revenue growth of 15%. The company has been reporting some good developments in the business that could lead to more gains going forward. However, as Seeking Alpha writer Andrew Lim wrote, Nuance could also be a value trap due to high executive compensation, an aggressive acquisition strategy and steep debt. So, should investors remain positive about Nuance's prospects or stay away from the stock? Let's find out.

Positives galore

Nuance has seen tremendous progress in segments such as healthcare, mobile & consumer, enterprise and imaging, thus recording 26% year over year growth in bookings in the previous quarter.

Nuance has built a strong portfolio in healthcare, driving significant demand from this sector. Nuance's growth is primarily driven by the recent product developments in healthcare solutions, such as Dragon Medical 360, Clintegrity 360, PowerScribe 360 and healthcare diagnostics that have led to high demand from retail as well as wholesale customers. Nuance anticipates higher growth in the second quarter as it is receiving positive response from its recent healthcare products, such as computer-assisted solutions and CLU-based solutions.

Nuance is also seeing strong growth in its mobile & consumer segment, recording handsome revenue of $115.3 million. The company has observed a significant improvement in its prospects after the recent launch of Nina -- the intelligent virtual assistant -- for its key customers such as Denso (OTCPK:DNZOF), Fiat (FIATY), Fujitsu (OTCPK:FJTSY), GM (NYSE:GM), Hitachi (HICHY), Kapsys, LG (OTC:LGEAF), Nokia (NYSE:NOK), Samsung (OTC:SSNHY), Volvo (OTCPK:VOLVY), and Yanfeng Visteon. Nina has both web and mobile-based solutions for its clients that provide a voice-enabled intelligent virtual assistant. Nina is finding good traction in the market and Nuance expects it to yield good returns in the future.

Nuance has also launched an upgraded version of Dragon Dictate for the Mac, equipping it with improved and accurate voice recognition, along with audio file transcription capability that has attracted consumers around the world. With this new innovation, Nuance anticipates higher growth and market share improvements going forward.

Nuance is also focusing on imaging solutions to drive its growth. It is finding good traction in this segment, providing imaging-based solutions to clients such as ABN AMRO Bank, Canon (NYSE:CAJ), Falabella, IKEA, Prince George, Ricoh (OTCPK:RICOY), Stinson, and Tetrapak. As the world is moving toward virtualization and digitization, Nuance is focusing aggressively on its imaging solutions, expecting this segment to deliver positive results in the long run.

Nuance provides various imaging solutions such as Critical Test Results Management, Radiology Decision Support, Paper Port PSP, streamlining clinical documentations, etc.

Turning to the negatives

Nuance faces some real trouble from Apple (NASDAQ:AAPL), its customer for Siri, the voice assistant in Apple's devices. It was reported last year that Apple was focusing on creating its own speech technology in an effort to move away from Nuance. In fact, Apple had gone to the extent of recruiting a couple of speech scientists from Nuance itself as it looked to develop its own technology.

It should also be kept in mind that Nuance's revenue growth has already slowed down a lot and any such development would lead to a big loss for the company. In the previous quarter, Nuance reported just 1.7% growth in revenue, while its earnings are expected to decline this fiscal year.

Moreover, as Seeking Alpha writer Andrew Lim pointed out in his Pro article, Nuance's management team takes home a whopping 90% of its operating income. For a company that's looking to grow its business by investing in the technology of tomorrow, this is not a good idea. Nuance should be investing in its growth rather than executives taking away a major share of the profit from a company that's currently incurring a loss.

Couple that with a relatively big debt burden of $2.36 billion, as compared to a cash position of $775 million, and Nuance might not have much room to flex its arms as it looks to grow its business.

Conclusion

There's no doubt that Nuance is coming out with really impressive products, as we saw in the first half of the post, but the danger of losing the Apple account and management missteps could be a big threat for the company. In addition, revenue growth has slowed down to a trickle and this throws Nuance's growth story in jeopardy. So, investors should be cautious while investing in Nuance, as this investment could go sour.

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.

Source: Will Apple And A Weak Management Take Nuance Down?