Nuance Bucks the Trend

By Dave Mock
October 2, 2008 | Comments (1)

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Nuance Communications (Nasdaq: NUAN) doesn't top any lists as a recession-resistant stock, but the company is at least showing some solid strength in a tough economic climate. While much of the market was struggling to stay out of the red yesterday, shares of speech-recognition company were soaring on the company's expectations of a brighter quarter ahead. 

The updated guidance added just a penny per share to previous earnings outlooks, but the new forecast was still enough for investors to bid shares up 15% yesterday. Even that boost still leaves shares down some 25% since last quarter's earnings announcement, but the fact that there's no real bad news in the coming quarter is music to investors' ears.

The company says its flagship Dragon Naturally Speaking software has gotten an enthusiastic welcome since its release. And the mobile sector continues to be strong, as device makers such as Nokia (NYSE: NOK), Motorola (NYSE: MOT), and Research In Motion (Nasdaq: RIMM) make speech-based interaction a standard feature in new devices.

Confidence is running high on the acquisition front as well: Nuance will take over the speech-recognition division at Philips (NYSE: PHG) for around $96 million in cash. The company already paid about one-third of the purchase price up front and will make a deferred cash payment for the balance in September 2009.

So will Nuance prove resilient in this dire market? I wouldn't go that far. I think management is still making prudent, though aggressive, moves to expand the business, but macroeconomic factors and costs from past acquisitions will weigh on future growth.

Consider that auto sales have plummeted in September -- Ford saw sales drop 34% from a year ago, General Motors (NYSE: GM) has fallen by 16%, and even Toyota Motors' (NYSE: TM) sales are down 32%. This decline hasn't concerned Nuance management before, but the downturn is sure to have an effect on Nuance down the road.

Nuance did say it will slow its acquisition pace in fiscal 2009 in response to the volatile market. So at least investors won't be seeing more dilution from stock payments -- for the time being, anyway.

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Fool contributor Dave Mock kicks tires on a regular basis, even his own. He owns shares of Motorola. Nuance is a Hidden Gems recommendation. The Fool's disclosure policy recognizes 55 languages and speaks fluent Icelandic.

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  • Report this Comment On October 02, 2008, at 4:41 PM, cthompso wrote:

    It seems odd to talk of how recession proof Nuance is without talking about it's medical transcription business - about as recession proof as it comes.

    With the Philips purchase, this line of business alone is forecast to pull in revenue of $410m, about half of this years projected total.

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