Recognizing Nuance [WSJ article from last month, but worth noting]
Speech-Software Firm Gains Eye of Investors
By SAMAR SRIVASTAVA
July 11, 2007; Page C3
Speech-recognition technologies are coming of age. Drivers tell Global Positioning Systems where they want to go. Callers speak commands into cellphones instead of pressing buttons. Doctors dictate patient histories into devices that automatically transcribe them.
Growing at 22% a year, sales of such technologies -- which remain imperfect -- are forecast to reach $2.3 billion in 2007, according to Datamonitor, a consulting firm.
That is good news for Nuance Communications Inc., the largest company devoted almost exclusively to selling speech-recognition software. Nuance has about 75% of the market for speech-enabled call centers, the company says. And about 50% of medical-transcription devices run on its software. The Burlington, Mass., company projects sales of $596 million this fiscal year.
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Investors have begun to recognize that. Nuance's shares reached a record high of $18.85 last month before pulling back recently. The company's market value now is about $3 billion. Many investors expect Nuance's shares to keep rising. They fell 52 cents, or 3.1%, to $16.45 as of 4 p.m. in Nasdaq Stock Market composite trading.
'Stock Is Still Cheap'
"I believe the stock is still cheap," says Michael Alpert, managing director of New York investment firm J&W Seligman & Co., which manages $20 billion. The firm holds 960,000 Nuance shares, according to its last reported position. "Their strategy is built around domination, and we think its earnings forecasts are low," he says.
One reason for the optimism: The company increasingly is cutting deals with directory-service businesses that pay recurring revenue rather than one-time payments, according to people familiar with the matter. Customers include AT&T Inc., Sprint Nextel Corp. and Jingle Networks Inc., these people say. Generally these payments range from one cent to five cents a call, according to Daniel Hong, lead analyst of customer interaction technologies at Datamonitor.
Also, Nuance has deals with companies such as LG Electronics, Nokia Corp., Motorola Inc. and Ford Motor Co. that pay it a royalty of 20 cents per cellphone that employs its software, and $3 to $5 for every device in automobiles that they ship with Nuance's speech-recognition software. Next year it will be in an estimated 250 million "smart" phones, vehicle-navigation systems and other devices, up from nearly 100 million this year, according to the company.
Growth From Acquisitions
Nuance has broadened its reach through a series of acquisitions; it has bought four companies in the past six months alone. Last month, Nuance announced plans to acquire Tegic Inc. from Time Warner Inc.'s AOL unit for $265 million. Tegic licenses the popular T9 cellphone technology that anticipates words as they are typed. Nuance plans to package this with speech-recognition software it currently sells to cellphone manufacturers.
Nuance's shares fell almost 8% upon announcement of the Tegic deal, partly on integration concerns. But analysts point out that Nuance has a good record with past acquisitions and that the share price has recovered some since.
Through acquisitions, Nuance has morphed into a center for speech-recognition services. This year, about 15 billion phone calls are expected to pass through call centers and other systems using its technology, up from 10 billion last year. By consolidating businesses, Nuance also has improved its operating margin, which widened to 23% in the first half of 2007 from 21% last year.
The company's expanded range of products has provided a hedge against disruption in any one product line, according to Chairman and Chief Executive Paul Ricci.
Valuation, Rivals
At about 32 times Nuance's estimated 2007 per-share earnings, the stock isn't screaming value. Competition also is a concern. Google Inc. and Yahoo Inc. are said to be working on their own speech-recognition efforts. In March, Microsoft Corp. acquired Tellme Networks, a speech-recognition company. According to people familiar with matter, the deal was valued at $800 million. That would value Tellme at nearly nine times sales. Nuance's stock is trading at a sales multiple of about five.
Analysts note that Nuance has, in the past, been conservative in forecasting earnings. It has beaten its earnings forecasts the past four quarters. Some investors still recall the 2000 collapse of Belgium's Lernout & Hauspie Speech Products NV, another high profile speech-recognition company, but that failure had more to do with improper accounting than faulty technology.
Investors also take comfort that competitors will have a difficult time catching up with Nuance, which has more than 400 approved patents. Perfecting speech-recognition technology requires collecting and studying large amounts of utterances and accents. Bill Meisel, editor of Speech Strategy News, an industry publication, estimates that it would take competitors some time to catch up with Nuance in more-advanced versions. "They certainly have more real-world data than anyone else," he says.
David Lehmann, a technology analyst at Luther King Capital Management, which manages $7 billion, says he expects the company to continue to outperform the S&P 500. He notes that many investors are unaware of recent advances in speech recognition.
"A lot of investors still don't believe in the technology, and that is one of the things that attracts us to it," he says. Luther King owned 2.8 million Nuance shares as of the end of March, according to LionShares.com. |
