Why Apple Can Take Nuance Down

| About: Nuance Communications, (NUAN)


Nuance already has weak fundamentals, and it risks losing business from Apple as its 10-K suggests.

Apple is reportedly developing its speech recognition software, and has hired former Nuance employees.

Apple's CarPlay can hurt Nuance's automotive prospects.

Speech technology provider Nuance Communications (NASDAQ:NUAN) is in a soup. Known for providing the technology for Apple's (NASDAQ:AAPL) voice assistant Siri, the company is going through troubled times. Nuance is still unprofitable, and has a negative return on equity of 6%. In addition, Nuance's revenue growth has slowed down remarkably, while it has a huge debt load of $2.37 billion as compared to cash of just $809 million.

An acquisition looks unlikely

Recently, there has been chatter on the Street that Nuance is exploring a possible sale and might be acquired by the likes of Samsung (OTC:SSNLF). As reported by the Wall Street Journal:

"Speech-recognition software maker Nuance Communications Inc. has held discussions with potential suitors regarding a sale of the company, according to people familiar with the matter.

The Burlington, Mass., company has recently spoken about a possible sale of the company with Samsung Electronics Co. and private-equity firms, some of the people said. It isn't clear where sale talks, some of which happened earlier this year, currently stand or if they will lead to a deal."

Hence, it is unclear whether Nuance will be able to find a buyer, and investors should consider this as more of a rumor. Moreover, given the fact that Nuance has weak fundamentals as stated earlier, it might not be able to find a buyer.

The company is still not profitable and its bottom line is expected to grow at the rate of just 0.76% for the next five years, worse than the growth of 3.75% in the last five. In addition, Nuance has a weak current ratio of just 1.67, indicating that the company might find it hard to meet short-term obligations, which doesn't make it good value at a market cap of almost $6 billion.

However, Nuance shares have appreciated on rumors of a sale, and if this turns out to be just a rumor, then they might fall.

Apple going its own way

Moreover, it looks like the company is about to suffer as one of its major clients, Apple, is reportedly developing its own speech recognition software. Although Nuance doesn't report the amount of revenue it generates from Apple, still, considering the huge number of iPhones that are sold around the world, it can be expected that it generates sizable royalty revenue from Siri. Moreover, it looks like Nuance is already facing problems due to Apple's in-house moves. As reported in the company's latest 10-K:

"Mobile and Consumer segment profit in fiscal 2013 decreased $84.6 million, or 37.2%, over fiscal 2012, primarily due to lower product and licensing revenue and increased investments in research and development."

It won't be surprising if Apple moves away

So, it is possible that Apple is already taking away some business from Nuance, as a result of which it saw lower licensing revenue in mobile last fiscal year. Moreover, there are indications that Apple is making its own speech recognition software, while Google (NASDAQ:GOOG) (NASDAQ:GOOGL) is another threat. According to a report on Forbes last year:

"Trouble is, Google and Apple are following the same evolutionary path for speech technology. Apple recently set up a research center in Boston (15 miles from Nuance's main offices in Burlington, Mass.), where former speech engineers from Nuance are working on a Nuance-free version of Siri.

Potentially, it could boot Nuance off the iPhone the same way it booted Google Maps as the default map service. That would be a major blow to Nuance's shares, already down 14% since the beginning of the year and trading at a relatively expensive 41 times 2012 earnings.

Google's speech-plus-artificial-intelligence technology, best seen through Google Now as a vocal way to search the Web, may be more promising. Nuance's speech technology is based on statistical inference methods that look at phonemes (syllable sounds) and context to recognize words."

Hence, there's a probability that Apple might move away from Nuance. Now, Apple has a team of "top speech technologists in Boston to eventually eliminate its dependence on Nuance for Siri," according to The Next Web. In fact, Apple has poached certain Nuance employees, such as Gunnar Evermann, who specializes in developing speech recognition technology; Larry Gillick, who is now Chief Speech Scientist, Siri at Apple; and Don McAllaster, another ex-Nuance employee who is now Senior Research Scientist at Apple.

The CarPlay threat

So, the writing seems to be on the wall for Nuance, and there is a strong probability that Apple is going its own way. Also, if Apple uses its own technology in Siri, this would be harmful for Nuance's automotive business as well. Nuance's connected car platform, known as Dragon Drive, is used by the likes of Audi, BMW, Daimler, Chrysler, Toyota (NYSE:TM) and others. Now, Apple is coming with its own solution, known as CarPlay, and this might spell trouble for Nuance.

Apple had launched CarPlay earlier this year. CarPlay is a rebranded version of iOS for automobiles, offering hands-free calling functions, Siri search, messaging, and maps. More importantly, Apple has tied up with several well-known car manufacturers for the use of Siri. As stated in an earlier post:

"Apple is looking to revolutionize in-car infotainment with this venture. Ferrari, Mercedes-Benz and Volvo (OTCPK:VOLVY) have already started shipping CarPlay-enabled cars. Going forward, Apple is looking to bring Honda (NYSE:HMC), Hyundai (OTC:HYMLF), Jaguar, BMW (OTCPK:BAMXY), Chevrolet, Ford (NYSE:F), Kia (OTC:KIMTF), Land Rover, Mitsubishi (OTCPK:MMTOF), Nissan (OTCPK:NSANY), Peugeot-Citroën (OTCPK:PEUGY), Subaru, Suzuki (OTCPK:SZKMY), and Toyota on board."


Hence, quite clearly, Nuance can come under pressure from Apple. The company already has weak fundamentals and huge debt. The advent of Apple's own speech-recognition platform can spell trouble for Nuance and constrict its growth further in the long run. So, investors are best advised to stay away from Nuance as it looks like a risky investment.

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