Speech technology has long been an area of hope, excitement and anticipation - both for the gee-whiz sci-fi aspects of it, as well as the practical and pragmatic business advantages. For Nuance Communications (Nasdaq:NUAN), though, it is not about the gee-whiz, it is about a real business, a real opportunity, and a real responsibility to execute on its potential for the benefit of its shareholders.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

The Quarter that Was
Revenue rose nearly 18% for the company's fiscal fourth quarter, no matter whether investors look to the GAAP or non-GAAP figure. On a non-GAAP basis, sequential growth was also a quite healthy 11%. Within the numbers, there was a quite a bit of good news. Enterprise revenue (which includes call centers, as well as customers like Vodafone (NYSE: VOD) and Comcast (Nasdaq:CMCSA)) was the weak spot, with a 5% drop in revenue, but healthcare was up 19%, mobile/consumer was up more than 34%, and imaging was up more than 43%.

Going down the income statement, gross profit (GAAP) was up 18%, while operating income fell 5%. Operating income was hit hard by increases in sales/marketing expense and stock-based compensation, as well as some amortization and acquisition-related expenses. For investors who are willing to look through to the non-GAAP numbers, operating income was up 18%.

The Road Ahead
At first blush, it is easy to think that Nuance operates in a field of gold. It does not take long to think of the myriad applications for speech-activated technology, including consumer devices and industrial applications. While it is true that Nuance's markets are likely worth many billions of dollars, that little detail is not lost on the likes of IBM (NYSE:IBM), Microsoft (Nasdaq:MSFT), Google (Nasdaq:GOOG), Alcatel-Lucent (NYSE:ALU) and many others. In a nutshell, that is a murderer's row of potential competitors if they all decide to really hone in on this market.

Competition is not the only thing that may trouble some investors. The company's mention of some weakness in consumer demand and potentially back end-loaded next fiscal year are short term worries. The large discrepancies between the company's GAAP and non-GAAP earnings, though, are a red flag to many value investors, even though the reported cash flow numbers are encouraging. Likewise, some investors have a bias against acquisitive companies, and Nuance has been an extremely active deal-maker with about 22 deals in the past six years.

The Bottom Line
These are busy days on the software M&A front, and there is no reason to think that Nuance could not be a target. While Microsoft would be an improbable buyer, IBM would make a lot of sense and Cisco (Nasdaq:CSCO) could be an interesting dark horse candidate. With solid client lists that include the likes of Apple, Amazon and Nokia, there could be a lot of leverage in Nuance for a bigger buyer.

On its own, Nuance stock is at a tricky point. The company has a business model that seems to throw off a lot of free cash flow, and it is easy to like a business that gets more than a quarter of its revenue from high-margin license revenue. Still, it does take some healthy (albeit not unreasonable) assumptions to generate an attractive target price. Consequently, this stock likely will not suit value investors, but growth and momentum investors could find an opportunity here. (For more, see The Characteristics Of A Successful Company) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  2. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  3. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  4. Mutual Funds & ETFs

    ETF Analysis: WisdomTree SmallCap Earnings

    Discover the WisdomTree Small Cap Earnings ETF, a fund with a special focus on small-cap and micro-cap stocks with positive earnings.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares US Regional Banks

    Obtain information and analysis of the iShares US Regional Banks ETF for investors seeking particular exposure to regional bank stocks.
  6. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  7. Technical Indicators

    Key Financial Ratios to Analyze the Mining Industry

    Discover some the most important financial ratios used by investors and analysts to evaluate companies in the metals and mining industry.
  8. Technical Indicators

    Key Financial Ratios to Analyze Retail Banks

    Learn about key financial metrics that investors use to evaluate retail banks, and how the industry is fundamentally different from most other industries.
  9. Technical Indicators

    Key Financial Ratios to Analyze Airline Companies

    Examine some of the most important financial ratios and performance metrics investors use to evaluate companies in the airline industry.
  10. Stock Analysis

    The 5 Biggest Canadian Oil Companies

    Obtain information about some of the largest and most successful major integrated oil corporations that are headquartered in Canada.
RELATED TERMS
  1. Profit Margin

    A category of ratios measuring profitability calculated as net ...
  2. Quarter - Q1, Q2, Q3, Q4

    A three-month period on a financial calendar that acts as a basis ...
  3. Debt Ratio

    A financial ratio that measures the extent of a company’s or ...
  4. Price-Earnings Ratio - P/E Ratio

    The Price-to-Earnings Ratio or P/E ratio is a ratio for valuing ...
  5. Net Present Value - NPV

    The difference between the present values of cash inflows and ...
  6. Long-Term Debt

    Long-term debt consists of loans and financial obligations lasting ...
RELATED FAQS
  1. What is the formula for calculating compound annual growth rate (CAGR) in Excel?

    The compound annual growth rate, or CAGR for short, measures the return on an investment over a certain period of time. Below ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. When does the fixed charge coverage ratio suggest that a company should stop borrowing ...

    Since the fixed charge coverage ratio indicates the number of times a company is capable of making its fixed charge payments ... Read Full Answer >>
  4. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  5. What is the difference between the return on total assets and an interest rate?

    Return on total assets (ROTA) represents one of the profitability metrics. It is calculated by taking a company's earnings ... Read Full Answer >>
  6. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!