By Investopedia | March 10, 2015
It's been a turbulent few years for Nuance Communications , even as voice-powered virtual assistants (many using Nuance's voice-recognition technology) continue to rise in popularity and acceptance. In fact, voice-recognition is becoming a staple of many consumer electronics these days, and Nuance is the clear leader in this field.
As shares have trended lower over the past three years, significantly underperforming the broader market, should investors consider Nuance as it sits near 52-week lows?
Where Nuance is coming from
The first thing to consider is whether or not Nuance is merely pulling back from being overvalued. Siri was released in 2011, which catalyzed the move toward virtual personal assistants that all the major tech players are embracing. That brought Nuance some welcome attention, since its voice-recognition technology was the backbone of many of these services.
However, the risk here was that all that attention could translate into hype that economic realities couldn't sustain. Indeed, Nuance's partnerships with major smartphone OEMs were shrouded in mystery, so investors didn't have much to go on.
That's why it's worth pointing out that Nuance's mobile and consumer segment hasn't grown much recently. On the contrary, mobile and consumer non-GAAP revenue in fiscal year 2014 was $441 million, down from $508 million in fiscal year 2012. Since virtual personal assistants haven't proven as "revolutionary" as some companies had hoped (even if they're becoming table stakes for platform operators), the initial hype has subsided -- bringing Nuance's valuation with it.
Where Nuance is now
The fact still stands that healthcare is Nuance's largest and most important business. This operating segment is marching steadily upward, bringing in $943 million in non-GAAP revenue last fiscal year. That's up from $669 million in non-GAAP revenue in fiscal year 2012.
The company has been working to transition toward recurring revenue sources, which now comprise two-thirds of sales. That's encouraging progress and evidence that Nuance can maintain growth. At a time when many tech companies are attempting to move toward subscription models, Nuance fits right in.
Nuance's aggressive acquisition strategy makes its GAAP financial results challenging, since it frequently reports heavy losses due to ongoing amortization and restructuring charges. Last quarter, the company posted a net loss of $50.5 million, or $0.16 per share. However, on a non-GAAP basis, net income was $82 million, or $0.25 per share.
This is also why it's important to look at Nuance's cash flow to judge how healthy the business is. Fortunately, Nuance's cash flow is strong. Operating cash flow jumped to $95.7 million last quarter, and free cash flow was $79 million. That puts Nuance's valuation at 14.7 times free cash flow, which is relatively low for its sector.
Where Nuance is going
Nuance remains uniquely positioned in both the healthcare and mobile markets, which comprise 70% of sales. As the healthcare sector continues to adopt transcription solutions (an admittedly slow process), Nuance's healthcare business will continue to thrive in the years ahead. At the same time, voice-controlled applications are on the rise, and Nuance's technology is frequently at the heart of those applications.
The company has had a tough few years, but investors with an appetite for risk should consider adding Nuance to their portfolios.
