Apple (AAPL) iPhone's Siri is infinitely more well known than Nuance (NUAN), the voice recognition company powering the famous virtual assistant. And that's okay with Nuance, which is enjoying double digit growth customizing voice solutions across healthcare, consumer and enterprise clients.
I last updated readers on Nuance back in May. In the piece I noted, "Given summer is historically a weak period for Nuance shares - it only finished July higher than it starts May in two of the past 10 years - any weakness may prove a great opportunity to buy ahead of stronger end of year sales."
So, with a fresh EPS report to dissect and exiting yet another tough seasonal period for returns, how likely is it shareholders will be rewarded when tailwinds return?
CEO Paul Ricci isn't shy about touting Nuance's opportunities.
I noted in previous articles Mr. Ricci's use of "unprecedented" in describing demand. In reporting FYQ3 numbers, Mr. Ricci didn't back away from this view, saying in this week's earnings call "in previous quarters we have indicated that the pace of the market activity suggest to us an unprecedented level of interest in our solutions.. This remains our perspective."
He also kept his lingo in line with last quarter in saying mobile and consumer remain "intense" and OEMs continue to race toward implementing virtual assistants.
Of course, it's to be expected the CEO will be the company's top cheerleader. The real proof comes from the numbers. And they seem to back Mr. Ricci up.
Top line sales were $431.7 million, up 31.3% YoY in FYQ3 - a fourth consecutive increase in year-over-year growth. GAAP net income nearly doubled to $0.25 while non GAAP came in at $0.45, up from $0.35 a year ago. Operating margin was 36.1%, up from 35.4% and cash from operations rose 41.4% to $141.5 million.
Q2 growth was driven by healthcare and consumer.
Given how much attention is being paid to voice driven consumer devices, it probably surprises some readers to learn Nuance's biggest segment is healthcare.
The company's voice dictation products generated $184.5 million in revenue last quarter, up 32.4% from the prior year. And the trend is likely to continue as everyone from pharmacy benefit manager Express Scripts (ESRX) and electronic medical technology company Cerner (CERN) embrace voice driven solutions.
Although healthcare is Nuance's largest revenue generator, consumer is closing in quickly.
Despite sluggish Apple iPhone sales last quarter, Nuance's consumer segment saw revenue increase 42.2% to $132.4 million as royalty revenue climbed, more OEM's incorporated voice and usage milestones kicked in.
While Siri is the highest profile voice assistant, Nuance powered systems are deployed in 70 Android mobile devices, including those made by Samsung (SSNLF.PK). Solutions are increasingly being built into autos, such as those from Chrysler, Nissan (NSANY.PK) and Toyota (TM) too.
And voice will make its first significant presence in television this holiday season. The TV market remains huge, with 247.7 million units sold in 2011. Given the size of the market and excitement surrounding voice controlled content, Nuance expects TV to add upside as early as next year.
Outside of its two largest segments, the company also sells customer driven voice solutions to enterprise customers. Such sales increased 6.6% to $74.5 million last quarter. And it provides image capturing systems too, which generated $56.8 million in sales, up 32.7% from last year.
It's pretty unlikely consumer companies will suddenly stop competing with one another. Instead, they'll continue to embrace next generation technology. Just as smart devices embraced voice following Apple's Siri, you can expect other markets will see a similar rush to next generation features. Given such a backdrop, Mr. Ricci's enthusiasm seems warranted.
Disclosure: I am long NUAN.