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Health Care Industry And Voice Biometrics — Growth Drivers For Nuance Communications, Inc. (NUAN)

Jan. 30, 2014 1:42 PM ETMSFT
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On January 21, Nuance surprised investors by raising its EPS and revenue guidance for the first quarter ending in December 2013. The company raised its EPS guidance to $0.23 to $0.24, from an earlier guidance of $0.18 to $0.21. The increased revenue guidance stands at $467 million to $471 million. This has created optimism around the stock after a dismal performance in 2013.

Looking into 2014, the imminent shift to ICD-10 in the health care industry and the increasing use of voice biometrics in financial services are two potential accelerators of growth for the company's top-line.

Shift from ICD-9 to ICD-10 in health care industry

An important trend in the health care sector is the impending implementation of coding standard ICD-10 in October 2014. ICD-10 includes five times more codes than ICD-9 contains. The new coding standard will significantly increase the number of codes used in billing systems once it is effective. As a result, documentation will take more time, increasing labor costs. This will drive health care companies to automate documentation and boost the revenue of providers of clinical information management (CIM) solutions.

The increasing need for automation in the health care industry has increased demand for Nuance's CIM solutions. The company generated revenue of more than $100 million in fiscal-year 2013 for its CIM solutions and added 35 new customers. In fiscal-year 2013, the company introduced Clintegrity, an automation solution that supports the industry's transition to ICD-10. This has helped the company's existing customers that adapted ICD-9 in shifting to ICD-10 as well as its new customers.

The potential for the company's CIM solutions is high because most health care providers have not yet implemented ICD-10 and are required to implement it by October 2014. Implementation of ICD-10 increases the demand for the company's CIM solutions as customers increasingly opt for automation. Apart from that, this will also make the company's ongoing transition smoother from a license-based revenue model to an on-demand revenue model as the company provides its Clintigrity solutions as a combination of on-demand services and term licenses.

Financial institutions are increasingly deploying voice biometrics

The demand for voice biometrics is growing from financial institutions, as they increasingly view it as the best way to secure customer accounts and financial information. Apart from security, voice biometrics also increases customer satisfaction and reduces costs associated with customer care. This increasing usage of voice biometrics is beneficial to Nuance.

Nuance successfully implemented its FreeSpeech voice biometrics for the institutions such as Barclays and Tatra Banka last year. After implementing voice biometrics, customer satisfaction increased at Barclays, while a reduced conversation time of 5% lowered costs. Another implementation at Tatra Banka reported that customer identification now takes 10 to 15 seconds, which has significantly improved customer satisfaction by 20% and secured customer transactions.

On Dec. 6, 2013, ING Bank Romania implemented Nuance's voice biometrics for customer authentication. ANZ bank had also tested Nuance's voice biometrics, indicating a growing use of voice biometrics in the financial industry. Nuance dominates the voice biometrics market with more than 35 million voice prints deployed, giving it around 80% of the total market. This gives the company an advantage in attracting more customers to its voice biometrics services as financial companies deploy them. The global voice biometrics market for the financial sector is expected to increase from $200 million in 2012 to $750 million by 2015. As the voice biometric market leader, Nuance will benefit greatly from the growth in this market.

The company's executive compensation is too high

Compensation for Nuance executives is extraordinarily high compared to its operating income. In fiscal-year 2013, Nuance's executive compensation was $43 million, almost 90% of operating income. The management is rewarding itself with hefty compensation.

This could change in the future, with Carl Icahn's recently increased stake in Nuance to 19%. He has two members appointed on Nuance's board of directors from his company Icahn Enterprises L.P. As a major shareholder, Icahn will push for changes that will increase shareholder value to increase the value of his stake. This may result in cost-cutting by management including a possible reduction in executive pay.

Conclusion

Nuance reported losses for the last four quarters, resulting in negative earnings of $115 million for fiscal-year 2013. As a result, the company's stock fell more than 30% last year. However, the company has strong growth prospects for 2014.

The company's leadership in the voice biometrics industry will help it benefit from the growing use of voice biometrics in the financial industry. Apart from that, the growing need for automation in the health care industry will help the company's health care segment grow. Meanwhile, Icahn will push the company's management to cut costs, which will increase operating income.

MissionIR provides investor relations services to publicly traded companies in exchange for compensation. This article may be part of our efforts to widen a client's exposure. To read our full disclaimer, visit http://disclaimer.missionir.com

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