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.

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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!

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