Nuance Communications, Inc. (NUAN)

[chmcnfunds]

Back in Nuance today. Chart not great but looks like triple bottom and oversold.

Bullish SA article out this morning:

___________________________________________________

Potential Acquisition And Break-Up Value Represent Huge Upside For Nuance Communications

Jan. 7, 2015 10:44 AM ET | 3 comments | About: Nuance Communications, Inc. (NUAN)
Disclosure: The author has no positions in any stocks mentioned, but may initiate a long position in NUAN over the next 72 hours. (More...)

Summary

NUAN has competitive advantages in four main business sectors: healthcare, mobile & consumer, enterprise, and medical imaging.
NUAN’s financial results are improving year-over-year and SEC filings are optimistic about the future.
A business segment analysis shows that healthcare and medical imaging are NUAN’s best businesses due to their high profit margins and high competitive advantage.
A potential list of acquirers could complete an acquisition of NUAN in 2015.
NUAN is extremely undervalued and would benefit from a partial sale to streamline the company.
Company Description & Competitive Advantages

Nuance Communications (NASDAQ:NUAN) provides voice and natural language processing solutions for businesses and consumers. NUAN focuses its solutions in 4 main business sectors: healthcare, mobile and consumer, enterprise, and medical imaging. Through the modernization of the healthcare industry, NUAN stands to make a fortune in selling healthcare solutions and medical imaging information systems through recordkeeping and analyzing software of medical records in digital form, making an industry-leading Powerscribe 360, and having a unique bioinformatics platform. In the mobile, consumer, and enterprise space, NUAN is pushing the trend of interconnected devices and more interaction between technological products and humans; NUAN makes voice-to-text, voice-to-maps navigation, automated speech recognition, biometric speech security systems, and cloud-based mobile applications. NUAN summarizes its core competitive advantages as extending technology leadership, vertically integrating themselves to be an all-service solutions provider, increasing subscriptions sold and increasing other recurring revenues, and making strategic acquisitions and partnerships.

Financial Charts

(click to enlarge)(click link below for charts/tables)


Note: Orange line denotes a projected number.

Source: Data from FactSet and Google Finance

(click to enlarge)


Source: Data from FactSet and Google Finance

(click to enlarge)


Source: Data from FactSet and Google Finance

Enterprise Value

Enterprise Value Calculation
Market Value $ 4,510,000,000.00
Cash $ 558,200,000.00
Total Debt $ 2,132,230,000.00
Preferred Equity $ -
Minority Interest $ -
Enterprise Value $ 6,084,030,000.00
Source: Yahoo Finance

Wall Street Analyst Estimates

Wall Street Analyst Estimates
Mean Analyst Estimate $ 18.90
Current Stock Price $ 13.86
Potential Upside 36.36%
Source: FactSet and Yahoo Finance

Business Segment Analysis

(click to enlarge)


Business Segments
Business Segment Revenue by Segment ($ in millions) % of Total Revenue
Healthcare $ 943.00 46%
Mobile & Consumer $ 451.00 22%
Enterprise $ 357.00 18%
Medical Imaging $ 286.00 14%
Source: Yahoo Finance

(click to enlarge)


Source: SEC 10-K Filing

Market Competitors to NUAN by Business Segment

Market Competitors by Business Segment
Healthcare Medical Imaging Voice & Language Enterprise
3M (NYSE:MMM) ABBYY Microsoft (NASDAQ:MSFT) Microsoft
M*Modal (OTC:MODM) Adobe (NASDAQ:ADBE) Google (NASDAQ:GOOG) (NASDAQ:GOOGL) IBM (NYSE:IBM)
Optum I.R.I.S (OTCQB:IRSB) AT&T (NYSE:T) Google
NewSoft Baidu (NASDAQ:BIDU) Cisco (NASDAQ:CSCO)
Intervoice
Avaya (AVYA)
Genesys
There are very few quality companies in each business segment that NUAN operates in. Out of its business segments, NUAN seems to have the most competitive advantage in healthcare and the faces the most competition in enterprise.

List of Potential Acquirers

Apple (NASDAQ:AAPL): NUAN already provides the voice recognition software to Apple's digital voice assistant, Siri, for all Apple mobile products. There are also rumors of Apple poaching the best NUAN employees to improve Siri. Apple can easily use its war chest balance sheet and acquire patents, talent, and ideas in order to develop a better in-house voice recognition, digital assistant, and artificial intelligence platform for its millions of Apple devices.

Samsung (OTC:SSNLF): Samsung may want to shift away from the Google Android platform and into its in-house developed Tizen operating system. Having a decent voice assistant in new Samsung phones would be a value-added commodity if they decide to drop the Android platform in the future and reduce dependency on Google. In addition, a Samsung acquisition of NUAN would create a tough situation for Apple in voice recognition and artificial intelligence.

Amazon: Amazon acquired a voice recognition startup called Yap in late 2011, and Amazon has not made a great return on this investment. Amazon buying NUAN would improve Amazon's web analytics and could revolutionize the retail industry with voice-activated online shopping.

Twitter (NYSE:TWTR): The social networking site could benefit from having voice-activated tweets to make it easier for consumers to share content. There is also precedent for social networks to be involved with speech recognition software, considering that Facebook (NASDAQ:FB) recently acquired a voice dictation startup called Wit.at.

Microsoft: In an effort to bolster Cortana, its artificial intelligence/pattern recognition platform and voice assistant, Microsoft could acquire NUAN to directly compete with Google Now/Google Voice Search and be an industry leader in the speech recognition subindustry. In addition, Microsoft is already a top five customer of NUAN, demonstrating that Microsoft already believes that NUAN makes good products.

IBM: In a continued effort to build up its data analytics, artificial intelligence, machine learning capabilities, and cloud enterprise solutions, adding NUAN's voice recognition system could be valuable to IBM. In addition, NUAN is already a top five customer of NUAN.

Other Companies: St. June Medical (NYSE:STJ), Agilent Technologies (NYSE:A), McKesson (NYSE:MCK), Thermo Fisher Scientific (NYSE:TMO), and Medtronic (NYSE:MDT) would benefit from purchasing the medical imaging and other healthcare solutions departments of NUAN.

Institutional Holdings

Top 6 Institutional Holdings
Institution Number of Shares (in thousands) % of NUAN shares
Icahn Associates 60,785 18.9%
ClearBridge Investments 22,409 7.0%
PRIMECAP Management 15,288 4.8%
Vanguard 14,537 4.5%
Fairpointe Capital 14,392 4.5%
BlackRock Fund Advisors 9,445 2.9%
Total Number of NUAN Shares Outstanding 321,220 42.6%
Source: 13F Forms as of 9/30/14 and FactSet
The top six institutional owners of NUAN own 42.6% of NUAN, which is a fairly high percentage given the concentrated nature of the holdings. Importantly, Carl Icahn and ClearBridge Investments are activist investors and own over 25% of NUAN. Activism investors usually have the tendency to increase shareholder value.

Risk Factors

As usual, no company is perfect, and NUAN does exhibit a few risk factors for investors. First, NUAN has significant debt with variable interest rates, and a rise in market interest rates would negatively affect cash flows and increase debt service requirements. Second, NUAN has made numerous acquisitions and has goodwill valued at $3.4 billion. Further acquisitions could dilute existing shareholders. Third, NUAN has adopted a poison pill, which could block Carl Icahn's shareholder activism, leading to less shareholder value being unlocked. Finally, Microsoft's Cortana, Google's voice search, and Google Now will provide stiff competition to NUAN's products in terms of voice recognition, speech-to-text, and artificial intelligence.

Disjointed Management

I have a fundamental belief that the current NUAN executive management do not work well together to maximize shareholder value. First, the executive management immediately moved towards a shareholders' rights plan (poison pill) to block Carl Icahn's steep buying of NUAN stock. This aggressive action against Icahn just screams of defense and a lackluster effort to engage in meaningful discussion with Icahn. Second, the executive management is not currently pursuing a sale or spinoff, which is irksome considering that more shareholder value would be unlocked. Third, while some NUAN Directors have purchased NUAN stock, the current management team, including Chairman and CEO Paul Ricci, continue to sell NUAN shares. Ricci sold 348,082 shares on November 28, 2014. I really hope that either the executive management makes a turnaround effort for the company, or Icahn and other investors change the company leadership, turnaround the company, and explore a sale through activism.

My Proposal

NUAN is an extremely undervalued business and is worth close to $7 billion in my opinion. Two potential triggers for the stock to trend upward include Facebook's recent of acquisition voice dictation startup, Wit.ai, and Carl Icahn's ~19% activist stake in the company (his firm is currently holding a loss in this position). NUAN has an incredibly strong business in healthcare and medical imaging: less competition, more NUAN product differentiation, and high profit margins. While NUAN's enterprise and mobile departments still fair well, NUAN faces lower profit margins and stiff competition from large technology companies. Overall, I propose to spin off or sell the enterprise, mobile, and consumer business segments of Nuance Communications. This will streamline the company to focus on its high-margin core strengths: healthcare and medical imaging. Luckily, a few companies would strongly benefit with realized synergies from acquiring NUAN's enterprise and mobile departments. Overall, with a spinoff or sale and a subsequent consolidation of NUAN's corporate activity, efficiency and shareholder value will tremendously increase.
_____________________________________________________________

http://seekingalpha.com/article/2803715-potential-acquisition-and-break-up-value-represent-huge-upside-for-nuance-communications?uide=996949&uprof=46

NUAN