Nuance's Acquisition Of Tweddle Connect Offers Big Growth In Automotive Sector

| About: Nuance Communications, (NUAN)
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Last week, Nuance (NASDAQ:NUAN) chief executive officer Paul Ricci confirmed what investors had thought for a long time. Nuance, the popular voice recognition company, confirmed its relationship with Apple (NASDAQ:AAPL). "We're a fundamental provider for Apple," Ricci offered up when asked about popular Apple component SIRI. While this Apple connection was making news headlines, Nuance acquired a company that could transform one business segment and offer value investors solid returns.

Tweddle Connect offers in-car "infotainment systems". This will give Nuance a further lead in the connectivity of automobiles. Nuance currently provides Dragon Drive for customers like Audi, BMW, Chrysler, Ford (NYSE:F), General Motors (NYSE:GM), Hyundai, and Toyota. Tweddle Connect has relationships with Toyota (NYSE:TM) and Lexus. Dragon Drive provides several technologies that are becoming increasingly popular in automobiles.

  • Text to speech
  • Voice dialing
  • Message dictation
  • Navigation
  • Local search
  • Music search
  • Climate control

Automobiles that use Tweddle Connect allow users to connect to Bing, iHeart Radio, OpenTable and Pandora. Nuance is planning on combining the technology with its Dragon Drive technology. Nuance paid $80 million in cash for Tweddle Connect. The deal is expected to close by the third quarter of fiscal 2013. Nuance expects the acquisition to add $25 million in revenue and $13 million in cash flow in fiscal 2014. That number should jump going forward, as Nuance leverages existing relationships with automobile manufacturers to use Tweddle Connect technology.

ABI Research estimates that connected automobiles will grow at a 30% compound annual rate. They expect the number of connected automobiles to grow from 16 million to 53 million by the year 2017. Automotive News estimates that there will be over 200 million connected cars by the year 2016.

In the most recent reported second quarter, Nuance saw an impressive 15.9% increase in revenue. Non-GAAP revenue for the quarter was $484.0 million. Earnings per share were $0.34, which was a decrease from the previous year's $0.43. The decrease came from a lower operating margin of 29.1% (vs. 36.8%). Management was disappointed with the results, but investors should be encouraged by this recent acquisition.

The mobile and consumer unit was the second largest revenue generator for Nuance in fiscal 2012. The unit saw revenue of $508.3 million, which was an increase of 29.2% from the prior year. In the fourth quarter earnings report, Nuance named Delphi, Audi, Ford, and Nissan as new bookings. In the second quarter, Nuance saw mobile and consumer sales of $116.2 million, which was only a 1% increase. The acquisition of Tweddle Connect should easily take that business unit back to the double digit growth it has come to know and love.

Shares of Nuance have been hit hard in 2013. Shares are down 18.5% and trade close to fifty two week lows. Investors continue to see Nuance as only a play on the success of Apple products. Investors should take advantage of Nuance's depressed share price and ride the company into the future. Someday every new automobile will come connected, helping drivers perform several apps and tasks by voice command. Nuance will be the company to take advantage of this growth.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in NUAN over 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.