Dueling Fools: Nuance Bear

Until the recent market slump, Nuance Communications (NYSE: NUAN  ) was not friendly territory for a bear. Glancing at opinions over in the CAPS community, I'm clearly swimming against the current on this one (good thing I had salmon for lunch). While I hate to be the Debbie Downer at this party, I have reason to believe it's last call and time to find a ride home.

Great product = great stock?
Just to be clear, I'm not debating the value of speech recognition software. Its potential applications -- from AT&T (NYSE: T  ) call centers to consumer products for the home -- are countless. However, great products alone aren't enough to create great companies. How many would argue that McDonald's (NYSE: MCD  ) serves the best burger in fast food, yet they are the industry's undisputed leader.

When it comes to Nuance as an investment, I'm more concerned with the company's ability to create a sustainable and profitable business model than with the software itself. Unfortunately, I don't see much evidence that this is happening. In the last three years of operating history, a dime in profit has yet to trickle down to the bottom line, in spite of the fact that one of their divisions, ScanSoft Imaging Solutions, is a well-established carryover from the company's former Visioneer days.

Return and investment remains negative, while issuance of debt and stock to fund further development continue, along with a dizzying array of acquisitions that make a true "investment" in Nuance a near impossibility for most individual investors. In reality, it's more like a speculation, rolling the dice in hopes that everything will come out all right in the wash.

Competitive advantage?
In other words, does Nuance have any? While bulls are glad to talk about the company's recent exponential growth and speculate on future prospects in speech recognition, it's not like potential competitors are standing idly by. For one, there's that little software company in Redmond, although Microsoft (NYSE: MSFT  ) might sooner swallow Nuance whole than compete with them. And while neither seems to be nearly as successful as Nuance, NMS Communications (Nasdaq: NMSS  ) and Voxware (Nasdaq: VOXW  ) , along with a number of privately held companies, are chomping at the bit for a share of this market.

Of course, I wouldn't be concerned about competition if I were convinced that Nuance could fend them off. What concerns me is that speech recognition software could soon become yet another commodity product, causing these companies to compete more on price than quality. That's always a bad formula for shareholders.

Can you hear me now?
Thanks to CAPS, I have a number of fellow Fools who can make at least one point on my behalf: the very question of speech recognition's practicality. A number of Fools call out Nuance's Dragon Dictate by name, questioning its accuracy; its difficult to argue with those who recount bad experiences attempting to enunciate for a computer over the phone. What happened to the "good ol' days" when we could simply press a number?

In spite of our best efforts, software cannot replace real human beings who have no difficulty distinguishing your voice from the background noise of a passing truck. I'm sure there are many opportunities for speech recognition to grow more prominent in our daily lives, especially as its quality improves. Still, my enthusiasm remains tempered. We've seen companies like Dell (Nasdaq: DELL  )  stop sending so many customer service jobs overseas after receiving complaints. If, under pressure from Wall Street to meet growth expectations, Nuance pushes its technology too soon, it could easily meet similar resistance.

For me, the bottom line is that there are too many questions surrounding Nuance as a business (and even the concept of speech recognition) to convince me that this company will reward investors better than the market. Considering the number of compelling values currently available among more tried-and-true companies, why speculate here?

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  • Report this Comment On November 25, 2007, at 1:08 AM, svengineer wrote:

    You're making a classic mistake - confusing speaker dependent training (ie dragon naturally speaking) vs speaker independant (no training) speech reco which is where most of the speech reco biz makes their money.

    You are correct on one point - speech reco is a commodity product. But design of decent customer support is not - and that's what makes the difference. You can offer crap or you can build a great user experience, regardless of the underlying speech reco....

    W/regards to MS - and their purchase of Tellme - A not so hidden secret is that Tellme uses their own highly modified version of Nuance.

    Speech-reco does compete with "outsourced" customer support. Successfully. Why? because a good SPEAKER-INDEPENDANT speech-reco system offers consistency and a decent customer experience, coupled with quality because of the automation required to implement it. Ever had Dell not follow-thru or offer conflicting advice? Can't do that with automation. As John Chambers made so evident with Cisco, automation REQUIRES consistency and quality.

    Lord knows, Nuance has it's issues. But your analysis is so far from the technlogy and the market that it is simply both naive and inaccurate. W/regards to this particular analysis, your eponymous "Dueing Fools" is well-chosen.

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