What Are the Biggest Risks Facing Nuance Communications in 2013?

The market hasn't been too kind to mobile growth play Nuance Communications  (NASDAQ: NUAN  )  so far this year. Heading into the end of 2012, the company finds its shares down nearly 11%. However, investors have hung with it, in no small part thanks to its close ties to the tech investing storyline of the decade -- the rise of mobile devices, including smartphones and tablets.

Looking beyond its slumping share price, though, the company still managed a relatively strong set of financial performances this year, growing its top line by more than 20% each quarter. Translating those results to the bottom line, however, did prove somewhat problematic. Regardless, no one disputes the immense growth potential the company holds, and the massive payouts it could generate for shareholders as a result.

The real question when it comes to sizing up Nuance, and whether to buy in, is how likely shareholders are to see this outcome, The Fool recently enlisted one of our star tech writers to create a premium research report on Nuance. To acquaint our readers, we're including a brief excerpt from the report here for you today, free of charge. If you want to learn more about Nuance, you can access the report in its entirety by just clicking here. Enjoy!

In the mobile space, Google's (NASDAQ: GOOGL  ) Android remains the dominant operating system platform throughout the world. Google has also gone to great lengths to incorporate voice interactions into Android, although instead of licensing a third-party speech engine like Apple does, it has built its engine in-house. In fact, Google even hired Nuance co-founder Mike Cohen in 2004 to build its speech technology. Earlier this year, Cohen left Google to work at another start-up.

Google is a habitual disrupter, and the search giant effectively gives away its speech technology that's bundled within Android, which is open source. OEM and carrier customers that were previously buying from Nuance can now get a solid speech engine for practically nothing (most Android vendors still pay royalties to Microsoft (NASDAQ: MSFT  ) ). However, some key Android players still go beyond Android's capabilities. Samsung's S-Voice assistant, modeled after Siri, uses Vlingo's speech engine, a rival that Nuance acquired earlier this year.

Speaking of Microsoft, the software giant is also a big competitor to Nuance with its Tellme product, acquired in 2007. Nuance also counts IBM is also another large rival. These are large companies with vast resources to compete with.

Nuance's highly acquisitive strategy entails two different types of risks. First, the company needs to stitch together and integrate numerous companies it acquires and realize cost synergies otherwise it risks goodwill and intangible asset impairment charges. Second, this risk is amplified by the fact that Nuance likes to use debt to fund its acquisitions, and if they don't pan out as hoped, it's still on the hook for the money it owes.

Fortunately, acquisitions tend to be small. Most purchases cost under $100 million, although a handful have exceeded that threshold. That means the amount of incremental impairment risk that Nuance takes on for each acquisition is relatively limited, but at the same time the sheer number of purchases can make it more difficult to integrate them together.

Want to learn more?
Speech recognition is yet another nascent technology set to explode with the rise of tablets and smartphones, and no company is better poised to benefit from this coming boom than Nuance Communications. However, this growth story doesn't come without risks, too. The Motley Fool recently published a premium research report to break down what investors interested in Nuance absolutely have to understand before investing, so click here now to grab your copy today.

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