Nuance Communications, Inc. (NUAN)

[chmcnfunds]

Nuance's Price Tag: 50% Upside

Oct. 22, 2014 7:48 AM ET | About: Nuance Communications, Inc. (NUAN)
Disclosure: The author is long NUAN, TIBX. (More...)

Summary

Nuance is the industry leader in Voice-Recognition Technologies and a fast-growing Cloud Computing Company.
Recurring Revenue equates to 65% of all sales.
Private Market Value of $22.75 per share should be conservative price tag.
Over the course of 2 years, I have closely watched and studied Nuance Communications (NASDAQ:NUAN). One could classify this company as misunderstood because of an ambiguous executive management. I often find myself giggling at frustrated sell-side analysts during conference call Q&As. The stock itself has behaved very poorly and I have taken advantage of the decline with additional stock purchases.

My Investment Thesis in a nutshell:
As the eco-system of voice-enabled devices and apps grow, so will Nuance. I also believe we are very close to a tipping point.

One of the latest apps sporting Nuance's technology is the new Domino's (NYSE:DPZ) Pizza App for smartphones.

After reading Barron's over the weekend, I happened to discover a very interesting note in the "Activist Spotlight." Private Equity firms and strategic investors often acquire software companies at multiples of recurring revenue. On September 30, Tibco Software (NASDAQ:TIBX) was purchased for $4.3 billion or 7x its recurring revenue by Vista Equity Partners.

Since the buyout, rumors had emerged at Nuance during the summer. I thought it would be prudent to create a valuation based on the 7x recurring sales multiple paid for TIBCO.

During last August's Q3 conference call, CEO Ricci stated that Nuance's sales are now 65% recurring revenues and growing.

"Daniel Ives - FBR Capital Markets

In terms of the transition, obviously, we've kind of had ups and downs in the transition. Does it feel like the trend, the move to subscription, the model shift, we're kind of in that seventh to eighth inning? I know you can't talk much about 2015, but maybe you could just give some comment about where we are in that shift?

Paul Ricci- CEO of Nuance

I think the most factual way that I can answer that question is to make reference to a data point that I think it's in the prepared remarks, but also was in my opening comments, and that is that we're now at 65% of recurring revenues, and if you look back at the trend of the percentage for recurring revenues over the last four, six quarters, you've seen that growing steadily up. I think that percentage is going to continue to grow.

I can't say with confidence what it will do any given quarter because we could have in a particular quarter a significant conventional licensing deal or several conventional licensing deals, but I think as we look out over the next year, that percentage will continue to go up. To speak to what inning we're in, it's a little difficult to characterize it quite that way, but we are at a relatively high percentage of recurring revenues, so I think it will continue to go up though."

If we use the same valuation metric for Nuance, we have a Private Market Value (PMV) of $8.74 billion or approximately $22.75 per share.

Current Market Cap: $4.73b
Current Enterprise Value: $6.14b

Estimated 2014 Sales
Recurring Revenue %
Sales Multiple
Total Value
$1.9 billion
65%
7x
$8.74 billion
Total Buyout Value: $8.74b
Buyout Market Capitalization: $7.24b
(Current Mkt Cap * 1.53)/Shares Outstanding)
equates to ~$22.75 per share

For a company that is a leader in its industry and close to the tipping point, I consider this valuation to be cheap. A few months ago, I wrote an article, "Nuance: It's All About the Debt Redemption Baby", speculating that management could be prepping the company for a buyout (of +$23.30/share) or outperformance with the purchase of convertible debt. Coincidentally, the price using the Recurring Revenue multiple falls right into this range. This comparable buyout valuation only helps solidify my conviction on Nuance.
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http://seekingalpha.com/article/2582515-nuances-price-tag-50-percent-upside?uprof=46

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