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Nuance Communications (NASDAQ:NUAN) has long been known as the technology that powers the Siri voice recognition for the Apple (NASDAQ:AAPL) iPhone. Now the company is moving into the mobile virtual assistant area with the new Nina app technology. With a flat stock performance, Siri has done very little for the stock price. Will Nina make shareholders happier?

The company is a leading provider of voice and language solutions for businesses and consumers around the world. Its technologies, applications, and services make the user experience more compelling by transforming the way people interact with devices and systems.

The company reported strong Q3 2012 results that handily beat estimates with earnings coming in ahead of the $0.40 analyst estimates by $0.05.

Q3 Highlights

  • Nuance reported non-GAAP revenue of $448.2 million, which includes $16.5 million in revenue lost to accounting treatment in conjunction with acquisitions. Third quarter fiscal 2012 non-GAAP revenue grew 29.9% over non-GAAP revenue of $345.1 million in the same quarter last year.
  • In the third quarter of fiscal 2012, Nuance reported non- GAAP net income of $143.7 million, or $0.45 per diluted share, compared to non-GAAP net income of $111.2 million, or $0.35 per diluted share, in the third quarter of fiscal 2011.
  • Nuance's third quarter fiscal 2012 non-GAAP operating margin was 36.1%, up from 35.4% in the third quarter of fiscal 2011.
  • Nuance reported cash flow from operations of $141.5 million in the third quarter of fiscal 2012, a 41.4% increase over $100.1 million in the third quarter of fiscal 2011.

With cash flow from operations up 41%, the company is showing strong execution. The company is benefiting from increased demand in mobile phones, automobiles, televisions, and healthcare applications.

Q4 Guidance

The guidance for Q4 was on the low end especially in the revenue category. The company just beat estimates by $0.05 suggesting either some pull forward of revenue or the company being too conservative considering the bullish tone of the conference call. Either way, investors shouldn't be too focused on the literal numbers provided.

  • Nuance expects Q4 12 non-GAAP revenues to be in the range of $483 million to $503 million.
  • Nuance expects Q4 12 non-GAAP EPS to be in the range of $0.46 to $0.50.

Nina - Mobile App Virtual Assistant

The company introduced Nina, the virtual assistant for mobile customer service apps, on Monday. This technology gives companies the ability to quickly add speech-based virtual assistant options to existing iOS and Android mobile apps.

Nina combines Nuance speech recognition, Text-to-Speech (NASDAQ:TTS), voice biometrics, and Natural Language Understanding (NLU) technology hosted in the cloud to deliver an interactive user experience that not only understands what is said, but also can identify who is saying it.

AllThingsD has a good review of the product noting that the voice-based biometrics could improve security of mobile banking apps.

Nina also provides the ability for the company to acquire enterprise customers and diversify away from the major phone makers.

Debt Offering

The company has proposed to raise $600M at attractive rates in order to pursue accretive acquisitions in the future. This deal would raise total debt to $2B and net debt to $900M until spent.

Stock Performance

The stock performance over the last 5 years is rather shocking considering the growth of voice-enabled services. Though the stock hit $31 earlier this year, it is now down to $21. This level is virtually where it traded for most of 2007 prior to the financial crisis.

5 Year Chart - Nuance Communications

NUAN Total Return Price Chart

NUAN Total Return Price data by YCharts

Risk

The risk remains that Google (NASDAQ:GOOG) will be able to develop a competing or even better product for Android phones. Or Apple will do the same for the iOS mobile devices. Or even worse that voice-enabled technologies will become a commodity item on any device whether mobile phones or in medical applications.

Valuation

The stock is currently one of the cheapest technology companies around. With a cash flow run rate of around $600M based on Q3 numbers, the stock only trades at 11x those cash flows.

The stock also only trades at 12x forward earnings estimates compared to a 5 year growth rate of 17% expected by analysts. Any time the growth rate exceeds the forward earnings multiple, the stock is considered cheap.

Using either metric, this hot technology company trades at a discount to the market showing that investors clearly place a huge discount on the stock due to the risks.

Conclusion

After reading the earnings report and listening to the conference call, it is difficult to understand the reason for the 3.5% selloff today. Sure the revenue guidance was low, but the stock is very cheap.

The new products suggest the company has the ability for strong growth over the next few years. The demand for language enhanced technologies appears to only be expanding in contrast to the stock price.

The stock offers an attractive entry point right around $21.

Source: A Cheap Nuance

Additional disclosure: Please consult your financial advisor before making any investment decisions.