Revenue growth may also be limited as the company pushes out some technology deals with phone makers in order to gain some pricing leverage. With investors concerned over the impact the transition was having, NUAN dropped from $23 a year ago to current prices around $15.
But recent evidence suggests that Nuance may be turning a corner. Last week, management pre-announced positive results for the fiscal first quarter (ended in December) that trumped analyst expectations and beat previous company guidance. The company expects to see revenues of $487-$491 million, up from previous guidance of $477-$487 million. Projected earnings of 23 cents to 24 cents a share were also higher than initial estimates of 18 cents to 21 cents per share.
Of course, one quarter does not make a trend, but the raised guidance was an encouraging sign. Given the current valuation of 12X forward estimates of $1.22 in earnings, which is roughly in line with projected growth and a bit below market multiples, the Street was looking for “show me” story when Nuance announced its first-quarter revenue.
NUAN stock slid a bit after the announcement, despite the company posting better than expected results and moving its guidance numbers higher.
But the pullback gives us a chance to get in now, while the company has multiple new revenue streams in place that are just starting to materialize, from voice biometrics (which could be a boon to financial institutions and others looking to protect sensitive data) to new avenues like voice ads.
Let’s not forget about that big-name shareholder I mentioned. Nuance has come under fire in the past for its corporate payment structure, when the CEO’s salary famously accounted for 50% of operating income. But now, activist investor Carl Icahn owns about 18% of NUAN – up from the low-single digits a year ago. He’s also managed to get two of the 12 board seats.
Some investors have speculated that he will push for a breakup of the company or at least a substantial change in management. And given his recent famed forays into Apple, where he owns about $4 billion in shares, other industry watchers think he’ll push for AAPL to buy NUAN.
For now, Icahn has said he would not do that, but his presence certainly brings a level of attention to NUAN. Whatever course of action Icahn takes (and given his level of persuasion, other large shareholders may be inclined to join him), it’s likely that major changes are in the offing for this company, and that could send the stock soaring.
In the meantime, with a little cost discipline as new software revenues materialize, $1.22 in EPS and a mid-single digit growth rate may prove to be conservative. If the company can get to $1.30 in near-term annual earnings, multiple expansion to the high teens gives us a target of $23.