The most exciting feature on Apple's (AAPL) iPhone 4S is Siri, which makes Nuance Communications (NUAN) the best bet for investors looking to play the Apple supply chain ahead of a rumored iPad 3 next month and iTV later this year. It's hard to imagine Apple isn't planning Siri integration in both products. But, more importantly, competitors are eager to close the technology gap with Apple - suggesting phones are ringing more loudly at Nuance since Siri's debut.
Last week, investor's gave a collective yawn when Nuance reported fourth quarter mobile and consumer sales rose 23% from last year. Speculators bid shares up 13% in the two weeks ahead of earnings, only to take shares similarly lower following the company's seemingly lackluster earnings.
But for investors willing to look beyond the whipsaw, a much more bullish story emerges. Sales across Nuance's healthcare, enterprise and imaging business all increased. And while mobile is an increasingly important contributor to revenue growth, the company's biggest segment by sales remains healthcare, which is undergoing a seismic shift away from manila folders.
|Segment||Q4 Revenue||Quarterly Revenue Growth: Year over Year|
|Mobile & Consumer||$108.5 Million||23.7%|
The bullish sentiment was evident in Nuance's conference call, during which CEO Paul Ricci used terms such as "unprecedented" to describe product interest and "meaningful" to describe future revenue contributions from contracts currently under negotiation.
In the quarter, sales rose 19% across the entire company and earnings increased 21%. For comparison, growth at other Apple vendors including Triquint (TQNT), Skyworks (SWKS), Omnivision (OVTI) and Broadcom (BRCM) all came in lower.
Apple's goliath purchasing power gives it margin compressing might when negotiating deals with suppliers, which has weighed on supplier profits. However, Nuance's products are different than other vendors, which typically sell Apple highly commoditized chips and components.
While there are many different sources for chips, there are far fewer options for voice recognition. And, this gives shareholders a needle moving benefit as Nuance relationship with Apple deepens.
Disclosure: I am long NUAN, BRCM.