Is Nuance Really A Buy?

| About: Nuance Communications, (NUAN)
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After trading as low as $18 in 2013, Nuance Communications (NASDAQ:NUAN) crawled back to above $23 before plunging again, thanks to a disappointing second quarter earnings report. Investors gained confidence in the shares when Carl Icahn took a 9.3% position in the company. The former high-flier once had positive momentum stemming from the implementation of Siri voice recognition software in Apple (NASDAQ:AAPL) devices.

Does the latest sell-off suggest more downside to come despite Icahn taking a bullish position in the company?

Voice-Recognition Competition for Nuance is Coming

Nuance gained greater attention from investors after Apple released Siri, but like every other new thing in technology, voice-recognition solutions offered by Nuance do not have a moat. Google (NASDAQ:GOOG) released Google Now, which lets users launch a search through search commands. For now, Google's voice recognition solution will have limited impact for Nuance. Google Now only works on the most current Android operating system, Jelly Bean. On an Apple device, users need to first launch the Google Search app.

Quarterly Results: The Good and the Bad

Nuance reported a GAAP sales increase of 15.6% in its second quarter of 2013. Revenue grew 53% in healthcare, 1% in mobile and consumer, and 4.4% in the imaging segment. Revenue declined 18.5% in the enterprise segment.

The company lost $25.8 million, or $0.08 per share, compared to a $0.9 million net income last year. Non-GAAP earnings were $0.34 per diluted share, down from $0.43 per diluted share last year. There are a number of other troubling figures in the results. Margins (non-GAAP) dropped to 29.1%, down from 36.8%, while operating cash flow dropped to $93.1 million, down from $100.5 million.

Another notable result was that in the professional services and hosting segment, revenue grew from $155.5 million last year to $213.3 million, or up 37.1%. The cost of revenue for this segment grew at a faster pace, up 42.5% to $138.5 million.

Nuance ended the quarter with around $1 billion in cash and cash equivalents, but has an outstanding debt of $2.34 billion.

Alternatives: Companies Growing Outside PC Sector

To offset its exposure to the weak PC market, Nuance is growing its presence in mobile. Similarly, Synaptics (NASDAQ:SYNA) supplies touch-screen solutions for the PC and mobile sector. The company recently raised its quarterly guidance above consensus. Synaptics expects revenue of between $190 million to $205 million, well-above the $158.2 million consensus, thanks to stronger sales from the mobile space.

OmniVision (NASDAQ:OVTI), whose shares rose from around $112 to close at $14.33, makes image sensors for computers and mobile devices. The company also supplies sensors for Apple devices. In February 2013, the company provided quarterly earnings guidance that was below consensus. OmniVision expects sales will be as low as $300 million on earnings of $0.14 - $0.29 per share. The consensus estimate was for earnings to be $0.32 per share on sales of $371.4 million.

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News that Carl Icahn held a position in Nuance gave the company a temporary catalyst in support for its shares. On April 30, Icahn raised his position to 10.7%, up from 9.3%. This raises the possibility that the corporate raider will instigate changes to improve shareholder value. Another short-term rally is possible, but the medium term outlook is cloudy. Nuance already raised spending in Research and Development from $54 million to $72.6 million in the first quarter. As Google, a heavy-weight market maker in the mobile space, enhances voice-activated solutions, Nuance will be more dangerously reliant on Apple.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.