Nuance Communications Inc: Why Shares Could be a Buy

Nuance has several catalysts that could take the stock higher.

May 30, 2014 at 11:00AM

Nuance Communications (NASDAQ:NUAN) is known for providing the technology for Apple's (NASDAQ:AAPL) Siri, but the company's performance in 2014 hasn't been as impressive as its well-known client. Nuance shares gained just 7% so far this year, and a strong second-quarter report wasn't enough to boost its momentum. However, Nuance had a number of positives in the second quarter that could propel its business in the long run.

Let's take a closer look at Nuance's business, and see if it's worth investing in for the long run.

Growth across the board
Nuance witnessed a remarkable increase of 43% in bookings in the second quarter. The company exceeded its 15% annual bookings-growth guidance, and ended the quarter with a backlog of $638 million. The growth in bookings was fueled by strong demand for its health-care, mobile and consumer, and automotive solutions.

Nuance's book-to-bill ratio stood at 1.34 at the end of the quarter, suggesting it received more orders in the quarter than what it billed. Moreover, its deferred revenue also increased to $505 million, rising nearly 30% versus the year-ago quarter. These metrics indicate that good growth lies ahead for Nuance. 

The company's results were decent, as well, as it reported non-GAAP revenue of $490 million, and earnings per share of $0.28. The numbers exceeded analysts' expectations of earnings of $0.23 per share on revenue of $484 million.

Mobile success
Nuance's mobile business grew considerably year over year. It is expected to grow in the coming years as mobile phones and tablets are equipped with enterprise solutions. Moreover, as there is an increase in popularity for speech-interface solutions, Nuance should benefit. Hence, Nuance has a healthy outlook going forward due to robust demand for its mobile and health-care voice solutions. 

In addition, the company has a strong client base such as Apple, LG, Nokia, and Samsung that are using its voice-enabled intelligent virtual solutions. The partnership with Apple looks lucrative, as the smartphone company is expected to produce a record 80 million next-generation iPhones this year.

Apple's total addressable market is expected to increase this year for a couple of basic reasons. First, the company is going to introduce bigger iPhones, according to numerous supply chain rumors, which will enhance its demand from customers inclined toward bigger devices. Second, Apple now has a partnership with China Mobile, the world's largest telecom operator, to sell its iPhones in China. These two factors should increase sales of the iPhone this year, and will result in more licensing revenue for Nuance.

The company recently announced a partnership with Oracle (NYSE:ORCL), which has selected its voice and language offerings for its portfolio of mobile applications. Oracle will be using Nuance's solutions, including Nuance Cloud Services for mobile apps that support ERP, SCM, CRM, and HCM. Also, Oracle's other applications, such as Oracle Eloqua Marketing, Oracle RightNow, and Oracle Taleo Cloud Service, will also be integrated with Nuance's voice solutions.

Nuance is also committed to improve its earnings performance going forward. The company has increased its focus on reducing expenses and delivering cost synergies to enhance efficiencies and its gross margin. For this reason, the company is optimizing investments in its business accordingly, and has increased the scrutiny of operating expenses to reduce them wherever possible. 

Bottom line
Nuance seems set to benefit from a number of catalysts going forward, and at a forward price-to-earnings ratio of less than 13, it looks like a bargain. The company's state-of-the-art voice and language processing capabilities have helped it land a number of well-known customers. This will lead to an improvement in revenue and earnings going forward. Although the stock is up just 5% in 2014, it has the potential to go higher on the back of a strong business.

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Sharda Sharma has no position in any stocks mentioned. The Motley Fool recommends Apple and Nuance Communications. The Motley Fool owns shares of Apple, Nuance Communications, and Oracle. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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