Speech Recognition Software: Nuance Communications Has Got The Gist

| About: Nuance Communications, (NUAN)

Nuance Communications (NASDAQ:NUAN) is one of the leaders in speech recognition software. After decades of development, this market still hasn't fully evolved into a predictable animal yet. Nonetheless, Nuance survived the rough times, pushed into profitability in 2005, and now is on track for strong earnings growth ahead.

Deals like the one announced last week with AT&T (NYSE:T) to automate it's 1-800-YellowPages are also helping to raise the profile of Nuance with investors. The stock price has climbed to $11.67 currently from $8.25 when we wrote about it in September and from $3.58 when we featured it in the spotlight two years ago.

Voice-driven computing is a very intriguing technology and a market with huge potential. There remains plenty of risk, but it's finally safe to say that speech recognition has grown from awkward novelty to mainstream commercial application. Early applications of speech recognition in the late 80s and early 90s were a well-publicized flop. What's changed in the past 15 years? Plenty. Processor speeds have advanced tremendously, high-capacity memory costs have plunged, and the technology itself has been refined. Now voice driven technology works well at viable cost levels. Just as important is the fact that the market isn't limited to the desktop anymore. There is now an array of markets for speech recognition applications, not to mention text-to-speech applications. Internet usage is just one driver, others include cell phones, in-vehicle applications such as navigation and communication, consumer electronics, and a host of other non-PC computing devices.

Another long-term market driver is miniaturization. At some point it gets ridiculous to try and put a numeric keypad--much less a keyboard--on all the portable electronic devices we'll be using a few years down the road. Speech is the obvious answer for human interaction with these machines. Instead of asking humans to act more like computers, the computers will act more like humans by "listening" and "talking" to the user.

While there are certainly desktop applications for speech recognition, the grand prize is enabling access to information through non-PC devices over the Internet and other networks, including wireless.

Just for starters, think of everything that is driven by touch-tone menus. Those will be voice-driven someday soon. Many companies have made web-based content such as stock quotes and entertainment information available via speech. Booking airline tickets and tracking packages are just a few more examples of applications already in place. Drivers in many metro areas can access information to help them through the commute by dialing 511 and talking their way through voice-driven real-time reports on traffic conditions and public transit.

One opportunity that is especially intriguing is customer relationship management [CRM]. This area is already a major focus for improved efficiency among businesses these days, and the cost savings of voice-driven computing solutions over call centers is massive. The key is to make it work well and leave customers with a positive result. Nuance's software advances the natural language performance and reduces the reliance on lists of predefined words, enabling more free-style speech by users.

Nuance is the result of several mergers that brought together many former competitors including ScanSoft, SpeechWorks, and Dictaphone. There are still plenty of rivals like Microsoft and Philips, along with specialist Intervoice, but Nuance is holding its own and Wall Street is quite fond of it. Of the eight analysts covering the stock, five rate it a Strong Buy and two call it a Buy.

In the fiscal year 2006 ended in September, Nuance posted a profit of $0.37 per share, up from $0.22 a year earlier, on revenues of $389 million. In FY2007, the consensus for EPS is at $0.47 and sales are expected to surge to $559 million. The earnings growth rate is expected to average 22% over the next five years.

It may be a few more years before speech-recognition becomes a mainstay in our lives, but the businesses built around this technology are making progress and it's hard to deny this will eventually be a huge market. As a leader in commercializing speech recognition technology, Nuance is a company worth knowing, especially with profits on the books now and a market that is finally maturing.

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Disclosure: Author has no position in NUAN.