Nuance Communications (NUAN) has been flying high, riding the wave of voice-based interactions in devices. This is a clear trend, whether it be Siri or even televisions embedding voice controls into new models.
Yet, like any stock, while Nuance has plenty of promise, it's still important for investors to stay abreast of the risks facing the company. Below is an excerpt from our Nuance premium report, addressing some risks facing that company that all investors should be watching.
Risks
In the mobile space, Google's (GOOGL -1.97%) 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 (AAPL 0.52%) 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 (MSFT -2.45%)). 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 (IBM -8.25%) 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.
