3 Reasons to Buy Nuance Communications

Apple (Nasdaq: AAPL  ) helped put Nuance Communications (Nasdaq: NUAN  ) on the map when it used the company's voice-enabled technology to launch Siri last year on its iPhone 4S. However, these days Nuance is proving that it's much more than just one of Apple's suppliers. In addition to mobile devices, the company's voice recognition software is finding its way into a handful of new products and key growth markets. Below, I've included three reasons why I believe Nuance Communications is a reliable investment today.

1. Expansion into new markets
Nuance has certainly played its cards right. The company's ongoing relationship with Apple offers one compelling reason to buy, though there are plenty more. The voice technology expert continues to win important design contracts for its speech-enabled platform, not only for use in smartphones, but also cars and medical equipment as well.

Today, Nuance technology is used in more than 70 million vehicles worldwide. Most recently, it landed a deal with BMW for its new connected car service known as "Dragon Drive! Messaging." Powered by Nuance, the navigation system in select 2012 BMW models will allow drivers to verbally compose and edit text messages and emails while on the road.

Ford (NYSE: F  ) is also one of Nuance's auto customers. The two companies have been working together for years now to create more intuitive infotainment options in Ford vehicles. Nuance helped Ford develop SYNC, its in-car voice activation service, which Ford hopes will help boost vehicle sales overseas when it debuts in Europe later this year.

In addition to automotive systems, a portion of Nuance's revenue comes from the health care industry. In fact, more than 3,000 hospitals in the U.S. rely on Nuance technologies, not to mention the 150,000-plus doctors that now use Nuance's Dragon Medical software.

2. Disruptive products
Nuance is also shaking things up in the automated customer service industry. Meet Nina -- the newest member of Nuance Communication's natural-language virtual assistant family. According to Nuance, Nina is the first of its kind. That's because the program integrates voice biometrics on an open SDK platform, which allows mobile app developers to customize their own virtual assistant.

The masterstroke is in Nina's voice biometrics technology -- a function that uses a caller's voice to verify his or her identity. Just imagine dialing your bank and instead of answering a series of questions to prove you're who you say you are, the system simply uses your voice to authenticate you as the correct account holder. USAA didn't waste any time jumping on board. The financial services company is hoping to take its mobile banking apps to the next level by integrating Nina into its customer offerings as soon as next year.

Something tells me this is just the beginning of a very exciting product cycle for the company.

Nevertheless, Nuance faces tough competition from tech titans like Microsoft (Nasdaq: MSFT  ) . The software giant has loads of cash on hand and little debt, which means it has the resources to develop its own voice recognition software. AT&T (NYSE: T  ) is another new competitor with deep pockets. The mobile carrier last month opened its speech application platform, Watson, up to developers. Yet increased competition doesn't change the fact that Nuance currently maintains one of the largest libraries of speech data in the world.

To remain competitive in the space, Nuance is leaning heavily on growth through acquisitions, as well as research and development. Earlier this year the company acquired Transcend Services. The transcription services company should help Nuance further expand its reach in the medical field. Management expects the purchase of Transcend Services to add revenue of between $140 million and $150 million in fiscal 2013.     

3. Long-term growth
In its last fiscal year, Nuance pulled in $1.4 billion in annual sales. However, the stock looks expensive at its current levels with a price-to-earnings north of 91, and at roughly 20 times its free cash flow. But the longer-term picture looks bright as recent acquisitions and increased focus on R&D start to pay off.

In its third-quarter earnings announced earlier this month, Nuance "delivered 30% year-over-year revenue growth, and 41% year-over-year operating cash flow growth," according to Nuance CFO Tom Beaudoin. That's not bad considering management is investing loads of cash into research and development. In fact, as my Foolish colleague Anders Bylund points out, the company's budget for R&D was up 33% year over year.

I like that Nuance is investing in its future and building products and services that I suspect will reward shareholders down the road. Given the company's leading technology and position within growth areas such as mobile, I'm giving the stock a five-year outperform rating on my profile in Motley Fool CAPS.

If you'd rather stick with a proven winner like Apple, I encourage you to check out the Fool's new premium research report on Apple. As part of the service you will also have access to a full year of timely updates on the stock. Click here to get started today. 

Fool contributor Tamara Rutter owns shares of Apple and Microsoft. Follow her on Twitter, where she uses the handle @TamaraRutter, for more Foolish investing news. The Motley Fool owns shares of Microsoft, Apple, and Ford Motor. Motley Fool newsletter services have recommended buying shares of Nuance Communications, Apple, Microsoft, and Ford Motor. Motley Fool newsletter services have recommended creating a synthetic long position in Ford Motor, a synthetic covered call position in Microsoft, and a bull call spread position in Apple. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On August 29, 2012, at 2:54 PM, derekkofc wrote:

    I would be very apprehensive in working with or investing money into Nuance. I personally have seen large projects involving millions of dollars and hundreds of consumers in one of their Medical projects they bought from another company. They have no clue about process, timelines, customer service. Many of the staff were clueless when it came to why a history of changes would be needed or how there product actually worked. They did not complete many of there deliverables and the staff had no understanding of how medical organizations work or the importance of PHI

  • Report this Comment On August 31, 2012, at 1:04 AM, sodapops wrote:

    I think Microsoft already tried the speech market. If I remember they had the Ford contract when they first introduced speech applications in cars. But it seems Nuance has it now.

    Speech is very complicated. Not a trivial thing to convert to bits and bytes. Nuance has been at it a very long time. Even companies with greater resources will not overtake Nuance in a short period of time.

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