After The Nasdaq Sell-Off, Only Nuance Communications Is A Buy

by: Chris Lau

The technology sector closed slightly lower for the week. The Nasdaq Composite Index dropped slightly by 0.5%. Companies reporting earnings fared worse, as investors responded negatively to their earnings reports. Which companies dropping after earnings are buying opportunities?

1) Cisco Systems (NASDAQ:CSCO)

Cisco dropped 13.68% for the week. During the quarterly conference call, CEO John Chambers touted the ability for the company to see market trends early and to have the ability to act quickly, both operationally and technologically. The company reported:

  • Total revenue of $11.6 billion, up 7%
  • 5% product revenue growth
  • 13% service revenue growth
  • GAAP net income of $2.2 billion ($0.40 per share) compared to $1.8 billion ($0.33 per share) the year before
  • Cash growth of $1.7 billion, up $48.4 billion

Investors sold off Cisco, because the company provided a cautious forecast. Cisco forecast revenue growth in the range of 2 to 5%. Gross margins are forecast to be in the range of 61 - 62%. In the next quarter, earnings will be in the range of $0.44 to $0.46 per share, which is a growth of between 10 and 15%.

Cisco said large shipments in Asia-Pacific, Japan, and China occurred during the reported quarter. Future quarters will not benefit from the large shipments in the region. Cisco is having success countering Juniper (NYSE:JNPR) and Hewlett-Packard (NYSE:HPQ), but Huawei might be proving to be a strong competitor with its 11% growth. Chambers discounted the competitive threat of Huawei, characterizing the company as spreading itself too thin. Cisco also saw some Huawei customers come back to Cisco, because its product offers better privacy of information.

Investors in Riverbed (NASDAQ:RVBD) will recall that the company lowered growth forecasts because the company is selling more complex products that have more options. In explaining the caution in its forecast, Cisco's CEO, Chambers said:

In terms of the caution, I'm just saying what the customers say to us, and we kind of fit in that model right now. If I was betting, I'd bet the second half of the year will be better for us and our next quarter that we're signaling. But we're going to wait and see, and we purely are going to spend per, I think it was Rod's question, very carefully as we go into this and to position ourselves to win either way. We have, we think, our competitors, including the Asian competitors, in a very vulnerable spot where we've made the changes now that they've not made and we've moved into the market growth areas that are really instrumental to our customers in terms of their success when our peers have not. Lots of them are still providing individual products and are either not capable or not trusted to be able to provide this at a much larger level.

Orders in China were down in the quarter. To compete effectively in the country, Cisco will need to sell designs from the bottom-up. The benefits from this approach will take multiple years. With the short-term benefits of layoffs to improve earnings absent, Cisco shares should be expected to trade flat for the next few quarters.

Bottom Line: With the challenges that lie ahead, investors might want to pass on Cisco for now.

2) Universal Display (NASDAQ:PANL)

Universal Display traded as high as $45 at the start of the month, but closed at $35.51 after reporting earnings that missed analyst expectations. The quarter was weaker than expected, because it did not include licensing fees from Samsung. The revenue will be accounted for in Q2 and in Q4. Investors bullish on Universal Display might cite OLED TV's as a source for revenue growth. The problem with this argument is that prices for OLED TV's this year are very high, with a 55 inch screen selling for up to $8,000. Still, DisplaySearch forecast 3 million units of OLED televisions by 2014, up from just 108,000 in 2012. Advertising for OLED TV's will be marketed before the London Olympics, which would raise awareness for this technology.

In its most recent quarter, the company generated $12.6 million in revenue, up 31% from last year. The net result for the current quarter was a $1.2 million loss ($0.03 per share loss), an improvement from the $11.9 million loss last year ($0.31 per share loss). The company experienced slower sales for green phosphorescent emitters.

Another negative was slow phosphorescent and host materials revenue. Universal Display expects the segment will not improve until the second half of this year. The company cited that it takes time for customers to adopt the new technology. Likewise, Universal Display pushed improving revenue from green phosphorescent emitters to take place in the second half of the year.

Looking ahead, $15 million in royalty payments from Samsung will be received next quarter, and again in Q4. For 2012, the company expects to generate revenue of between $90 million and $100 million.

Bottom line: Universal Display has a high risk profile. The company's most recognized licensing revenue stream is with Samsung. With 1400 patents, the company needs additional agreements in place with other companies, to smooth out the revenue stream. With interest in risky stocks on the decline, investors should take a pass on Universal Display for now.

3) Nuance Communications, Inc. (NASDAQ:NUAN)

Nuance Communications peaked at $30 in February, and closed recently at $23.10. The company forecast higher revenue due mostly from its acquisition of Transcend. The Transcend acquisition is forecast to add $50 million for the rest of the year, or $0.01 to $0.02 in earnings per share.

Looking ahead, Nuance expects to benefit from lower channel suppression for its Dragon product on the consumer side. Its eventual release should help the company generate improving growth.

Bottom Line: Investors should now consider Nuance shares. The company demonstrated an ability to acquire companies in a way that improves revenue growth. Nuance competes with Microsoft (NASDAQ:MSFT) and Google (NASDAQ:GOOG). Its software powers the Siri voice recognition for the iPhone 4S model from Apple (NASDAQ:AAPL). The recognition of the Nuance technology through the popularity of Apple will help drive revenue higher in Nuance's other product offerings.

Disclosure: I am long RVBD.