Over the past year, as we've grown more accustomed to simply
speaking requests into our smartphones, we've started typing less
It's a subtle shift right now, but in coming years, futurists
predict we'll be dictating our emails, tweets, text messages and
documents, as punching letters into a keyboard becomes a slowly
Yet the company that is leading this revolution,
Nuance Communications (Nasdaq: NUAN)
, has had little to cheer about lately. Its shares have been flat
for the past two years, even as the S&P 500 index has risen
50%. The fact that activist investor Carl Icahn has bought
more than 30 million shares this year and currently owns 16.9% of
the company still wasn't enough to boost the stock meaningfully
Yet in the quarters ahead, there are several catalysts in
place that could push this stock back toward the $30 mark. First,
a quick recap of Nuance's current woes.
Signs Of A Slowdown
Nuance posted very impressive annual results for the fiscal year
that ended September 2012. Sales, earnings per share (
), net income and cash flow all grew more than 25%, indicating
that the company's speech recognition technology was seeing
strong demand. Yet it was also apparent that key end markets were
slowing, when fiscal fourth-quarter results were released last
Sales in the health care segment, for example, came in at $190
million in the quarter, which slightly trailed consensus
forecasts. Government sales also began to slow ahead of the
sequester, and in the consumer dictation segment, revenues were
hurt by a shift away from upfront software purchases and toward
monthly licensing fees.
Those trends have continued to play out, and fiscal 2013 sales
are expected to grow just 12% to 13%, to about $1.96 billion.
That's quite a letdown for a company that had a 32% annual growth
rate going back to fiscal 2005 (though some of that growth was
juiced by acquisitions). Worse still, analysts expect sales to
grow just 6% in the fiscal year that begins in October.
Icahn's Presence -- And Plans?
News that Icahn began building a big stake in the company may not
have been seen as a welcome sign from management. After all, he's
known for ratcheting up a severe amount of pressure on
underperforming management teams, compelling them to make
short-term shareholder-friendly moves at the expense of long-term
Management has already identified a long-term plan, which was
articulated at an annual analysts' day last December. The plan
was to boost the sales force from 675 to 775 and to devote more
resources toward new product development. Those spending efforts
partially explain why per-share profits are on track to fall more
than 20% in fiscal 2013 (to around $1.30) and rise less than 10%
in fiscal 2014.
Thus far, Icahn has not publicly disclosed any tangible steps
he thinks management should be taking, but we can get a pretty
good sense of what he will suggest when he starts to bang the
drums more loudly. (In years past, Icahn has tended to take a big
stake, remain quiet for a stretch, and then become vocal.)
Back in 2008, Icahn owned a large stake in Motorola, and
eventually pressured that firm to split itself up. Motorola had a
pair of key assets: a growing presence in mobile communications
and a vast trove of patents. Nuance, too, has a strong mobile
presence -- it runs the technology behind
Apple's (Nasdaq: AAPL)
Siri -- and also owns more than 2,800 patents.
Staying The Course?
In the absence of any value-unlocking moves being pushed by Icahn
or others, what's the outlook for Nuance and speech recognition?
The company's recent sales slowdown has led some to conclude that
the technology is not a true game-changer and has already made
its deepest inroads into technology. They suggest that
touch-screens may be enough to satisfy most data input
requirements. And there have also been some concerns about speech
recognition accuracy, which is obviously a key consideration for
health care IT buyers.
|© 2013 Nuance Communications
Nuance's recent sales slowdown has led some to
conclude that its speech recognition technology is not a
true game-changer and has already made its deepest
inroads into technology.
Yet that's an incredibly myopic view, reflecting only what is
taking place in the company's business divisions right now in
2013. It's as if investors have chosen to ignore the powerful
long-term trends that have been in place for a decade and are
using recent tepid quarterly results as a sign that speech
recognition has a limited future.
Yet it's hard to fathom how speech recognition won't become a
larger part of our lives. Here's an example: The next generation
of refrigerators will already know what's inside, as consumers
can scan each item before it goes in or out. Using speech
recognition, time-stressed parents will simply ask the fridge,
"What can I cook for dinner based on the ingredients inside?" I
could cite other examples, but I'll point you toward this article
in MIT Technology Review instead.
The Road Ahead
Here's what to look for over the next six months.
- After Icahn boosted his stake in late August, he is likely
talking with the company about getting a seat on the board.
That allows him to argue his case from the inside. (Nuance
subsequently adopted a poison pill, so a hostile takeover is
- Look for Nuance to give Icahn a board seat on or before the
company's mid-November earnings release. At that time, expect
another set of tepid quarterly results.
- In December, during the annual meeting with analysts, look
for a discussion of the new products that have resulted from
the recent big push in R&D. Analysts will also more hear
about the rising traction of the new sales force hires, who
typically need nine to 12 months to become productive (which is
how long it has been since the sales force was expanded).
- Later in the winter, if shares still haven't budged from
current levels, look for Nuance to extend its current $500
million share buyback program (initiated last April) and to
become more receptive to selling one of its divisions.
Risks to Consider:
This is clearly a company in transition, so don't look for a
sudden uptick in quarterly results any time soon.
Action To Take -->
Carl Icahn's timing is perfect. Nuance is a proven industry
leader with a technology focus suitable to the decade ahead, yet
its shares are currently deeply out of favor. You'd be wise to
follow Icahn's lead, despite the obvious challenges the company
is facing right now.
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