In this article, let's take a look at Nuance Communications, Inc. (NUAN, Financial), a $5.48 billion market cap company, which provides speech, imaging and keypad solutions for businesses, organizations and consumers worldwide.
Acquisition strategy
The company has built an acquisition strategy in order to consolidate as the most diverse provider of speech recognition technology. As an example, the development of Apple's Siri feature, contributed to sustainable profitability.
Its products were introduced in hospitals, providing doctors with very important features due to the advanced technology used that also helped cut costs while increasing efficiency.
Last year, it was introduced as the Clintegrity 360, with innovative features such as the speech-recognition and language-understanding technology as well as coding software. Further, the technology should improve productivity for computer-assisted coding and clinical documentation.
Other companies acquisitions like Transcend Services, J.A. Thomas, and Quantim have helped to develop mobile health-care applications in a modern world and led Nuance reach new target hospital, principally that of small and midsize. Further, Nuance has developed some mobile applications for smartphones.
Dragon Drive
Although the firm faces strong competition from Google, it mimics Google's strategy of providing free speech recognition tools.
The firm plans to expand into new markets, like the automotive and consumer electronics industries. The new generation of its Dragon Drive-connected car platform. Dragon Drive is a part of its Dragon portfolio, which includes the Dragon ID voice verification software for smartphones and mobile phones. Using the voice, it enables consumers to search for what people need, for example "Find financial headlines."
Revenues, margins and profitability
Looking at profitability, revenue growth by 1.2% led earnings per share decreased in the most recent quarter compared to the same quarter a year ago (-$0.11 vs -$0.17). The gross profit margin is considered high, currently at more than 60%. However, the net profit margin of -11.4% underperformed when compared to the industry mean.
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| NUAN | Nuance | -4.37 |
| IBM | International Business Machines Corp | 72.32 |
| MSFT | Microsoft | 26.17 |
| Â | Industry Median | 6.8 |
The company has a negative ROE, which is lower than the one exhibit by International Business Machines Corp (IBM, Financial) and Microsoft Corporation (MSFT, Financial). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing, and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a price-to-book ratio of 2.1x, indicating a discount versus the industry average of 2.9x while the price-to-sales ratio of 2.8x is above the industry average of 2.25x.
As we can see in the next chart, the stock price has an upward trend in the five-year period.
Final comment
In my opinion it is the right time to add Nuance’s stock to your long-term portfolio because as outlined in the article, Nuance's top acquisitions include innovation constantly, and I expect revenue growth to continue aided by this strategy.
Despite having found a major weakness in the result of ROE, the firm has other highlights as its revenue growth since 2005. Moreover, the company is the leader in healthcare speech recognition and dictation software.
The fund Manning & Napier Advisors, Inc. added this stock to their portfolios in the second quarter of 2014. Other hedge fund guru with a large position on the stock is the activist investor Carl Icahn (Trades, Portfolio), who added the stock several times during 2013.
Disclosure: Omar Venerio holds no position in any stocks mentioned
