Last week, speech-recognition software manufacturer Nuance Communications (NUAN: Charts, News) acquired its rival Transcend Services (TRCR: Charts, News) for $313 million, its largest purchase in nearly four years. The deal offers an acquisition premium of 41%, or $29.50 per share, over the previous day's closing price. Transcend investors rejoiced as shares surged 39% to $29.18 last Wednesday on the news, its highest price since 1996, and finished the week at $29.20.
Nuance, based in Burlington, Massachusetts, creates speech and imaging applications across multiple industries, but its software most recently made headlines as the wizard behind the curtain powering Apple's (AAPL: Charts, News) Siri voice recognition application. Nuance also creates automated telephone, medical transcription, optical character recognition and desktop imaging software. It even owns a small business segment focused on exclusive development for the U.S. military and government agencies.
Over the past four years, Nuance has been focused on expanding its reach in the medical industry, acquiring rivals eScription and Webmedx in 2008 and 2011, respectively. Over the past year, Nuance has been especially active, spending a record $400 million on eight acquisitions. Mergers are nothing new to Nuance, which formed out of a series of mergers and acquisitions over the past decade, most significantly the merger between rivals ScanSoft and Nuance in 2005.
Although Nuance's acquisition offer of Transcend looks generous at first glance, a quick comparison to past deals reveals otherwise. Nuance's $313 million offer only values Transcend at 2.4 times trailing sales. Nuance had paid 8.1 times trailing sales for eScription four years ago. Some analysts believe that this was due to eScription's stronger operating margin of 39% compared to Transcend's 16% at the time of acquisition. For now, Transcend's shareholders seem content with the deal, and few expect a higher offer. The Transcend acquisition is another step in the widespread consolidation of the entire industry, in which Nuance is the clear leader. Transcend's chief rival, MedQuist, which has a short history of acquisitions, also purchased three companies within the past two years.
Nuance shareholders haven't had a smooth ride over the past month. Since the company announced its first quarter earnings on February 9, shares have dropped 15% while the rest of the market rallied. The company earned non-GAAP earnings of 34 cents per share on revenue of $382 million, missing earnings estimates on both. Analysts had expected 36 cents per share on revenue of $392.5 million on the same basis. However, this was a significant improvement over the zero cents per share on revenue of $303.8 million.
Nuance's gross margin rose 80 basis points to 66.7%, operating margin grew 360 basis points to 8%, and net margin improved 260 basis points to 2.6%. For the current quarter, Nuance expects earnings of 38 cents per share on revenue of $405.3 million. For fiscal 2012, the company forecasts revenue of $1.68 million, exceeding the average analyst forecast of $1.59 billion.
Although investors should expect Nuance to make more headlines due to Siri's popularity, investors should remember that the iPhone software does not comprise a significant part of the company's revenue. The stock trades at 14.75 times forward earnings and has a 5-year PEG ratio of 1.03, which signifies slow but steady growth potential down the road. Although the company is destined to be one of the last speech recognition software companies standing after the market consolidation concludes, investors should remember that the largest company won't necessarily perform the best, as acquisition indigestion can eventually erode margins. The company doesn't currently pay a dividend.
Other News About NUAN
Nuance Communications' Acquisition Of Transcend Is A Stellar Deal
Inside Nuance's acquisition of Transcend.
New iPad A Positive For Nuance, Qualcomm
Will Nuance's software also power Apple's new iPad? Other Stocks in the News
The 'Resolutionary' New iPad: A Disappointment?
Will the iPad 3 sell as well as its predecessors?
Annaly's Capital Management Inspires Confidence
Annaly's management team remains upbeat regarding the REIT's future.
Copyright 2012 by InvestorGuide.com, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA InvestorGuide.com, Inc.) or its employees responsible.