Nuance Communications Inc. (NUAN): Buy or Sell?

Investors punished Nuance Communications Inc. (NASDAQ:NUAN) after the company reported quarterly earnings that missed estimates, and guided several quarters of weak sales in two core business areas. Nuance now expects healthcare and sales in emerging markets (“EMEA”) to be weaker than previously estimated.

Business Model at Risk

Nuance, whose core business offering is in converting spoken words to text, is facing a fundamental decline in medical transcription volumes. As electronic records become more common in hospitals, healthcare transcription is declining. Investors should now expect volumes to remain weak for several quarters. Nuance depends heavily on the healthcare sector, as the company generated 51% of profits from sales to healthcare companies.

Other units performed better for Nuance. The Mobile/Consumer unit and Enterprise unit each increased sales by 17% and 10%, respectively. Imaging sales increased 6%.  For the first quarter (reported on Feb. 7 2013), Nuance earned $0.35 per share on revenue of $492.4 million.

Forecast

Nuance forecasts revenue of between $500 million and $533 million in its current second quarter. This translates to earnings of $0.36-$0.45 per share. The forecast is within consensus estimates of $0.44 per share and revenue of $524.3 million. For the year, the company expects to earn $1.76 – $1.87 per share on revenue of $2.146 billion – $2.196 billion.

Digging Deeper

The steep drop in Nuance shares could represent a buy for investors, as the surprise drop in healthcare sales removes a big premium in shares. At the current $20 share price, Nuance has a market capitalization of $6.3 billion and a P/E of 36.2. The forward P/E is now between 10 and 11.

Nuance is still building a cloud-based solution that makes the company agnostic to platform types. Vlingo and Apple Inc. (NASDAQ:AAPL)’s Siri make up nearly 30% of Nuance’s revenue, so it makes sense for Nuance to innovate using the cloud architecture. The Swype keyboard is also very popular on smartphone devices. Nuance updated the software with Living Language. This is a crowdsourced dictionary. Along with Smart Editor, which suggests words based on the structure of the sentence, Nuance is ensuring its relevance in the mobile space stays ahead.

Other Picks

Nuance is not the only investing idea that relies on a weak PC market while trying to grow in the mobile space. Synaptics, Incorporated (NASDAQ:SYNA) makes touch-screen solutions for both sectors, and is trading at around $35, close to a 52-week high. The company recently reported quarterly earnings that beat estimates. Synaptics (NASDAQ:SYNA) earned $0.53 per share on revenue of $143 million. The company’s revenue beat estimates by $5.3 million, and earnings per share by $0.07.