Comments from Raymond James, once again lifted from Nuance yahoo message board:
" Nuance reported an outstanding 4Q last night, coming in at the
upper end of the positive pre-announcement and further increasing
its lead in the speech recognition market. This quarter caps off a
transforming year for Nuance in which, through acquisitions and
organic growth, the company more than doubled in size, diversified
its revenue sources, expanded its presence in high-growth markets
it can dominate, and vastly expanded operating margins. We are
reiterating our Strong Buy rating and $15 target based on 26x FY08
pro forma EPS estimate of $0.59; 26x is roughly in-line with EPS
growth. $15 also represents a FCF yield of 4% on 2008.
- 4Q revenue was $133.2 million vs. our $130.3 million estimate and
EPS of $0.14 vs. our 0.13 estimate (our estimate prior to the preannouncement
was $0.11). Nuance also doubled cash flow from
operations sequentially to about $27 million. Organic growth was
29% for the entire company, 47% in speech and -7% in digital
imaging. Nuance also issued formal FY07 guidance. FY07 revenue
guidance is $555-570 million and pro forma EPS of $0.46-0.49 vs.
consensus revenue of $547.3 million and pro forma EPS of $0.46.
Nuance expects network speech to grow 25% organically in FY07.
1Q07 revenue guidance is $128-131 million vs. consensus of $128.4
million and pro forma EPS guidance of $0.10-$0.11 vs. consensus
of $0.10.
- We are raising our FY07 pro forma EPS estimate by $0.01 to $0.47
on revenue of $556.8 million vs. $544.7 million previously. 2008 pro
forma EPS estimate increases by $0.01 to $0.59.
Reiterating Strong Buy Rating; $15 Target
We reiterate our Strong Buy rating and $15 target on NUAN. The company has leading market share in
highly attractive markets, and in the recent quarter increased its lead. Nuance also has substantial diversity
to its revenue streams, providing the company with high levels of visibility, we believe. The benefits of the
legacy Nuance acquisition are starting to pay off, as our channel checks indicate pricing in the industry has
stabilized and in some instances, is even increasing. A new head of sales, launch of the fully integrated
engine in F2Q07, continued uptake of speech recognition in contact centers, and new mobile opportunities
provide a strong foundation for growth in the network speech segment. In dictation, the launch of v.9 of
Dragon and excellent execution in Dictaphone provide strong growth drivers. As is typical, Dragon revenue
will likely moderate in upcoming quarters, but produce strong y/y growth for that segment. Dictaphone is
ahead of schedule and our checks indicate it could hit $50 million in quarterly revenue in F1Q, with the ASP
and radiology products growing rapidly. Nuance is clearly focusing on opportunities in mobile for its
embedded systems business, with substantial opportunities surrounding mobile messaging and search, both
of which we expect to be a material 2H07 driver.
NUAN is trading at only 18.6x our 2008 pro forma EPS estimate of $0.59, despite its leading position, 25%
EPS growth rate, and FCF generation of $100+ million. We see more than 35% upside in the stock of this
strong company, and would be aggressively buying the shares at today’s prices. Catalysts for the stock
could be: launch of the Quantum engine and resurgence in network speech growth rates to over 20%,
continued momentum in Dictaphone, additional wins for Dictaphone’s ASP business, mobile wins in
embedded and network speech categories, recognition that Microsoft (MSFT/$29.23) is likely deemphasizing
the contact center market in its new product release, and another quarter of strong cash flow generation." |
