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International Business Machines Corp. (IBM), Nuance Communications Inc. (NUAN): A Closer Look at This Software Company’s Recent Results

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Nuance Communications Inc. (NASDAQ:NUAN)Nuance Communications Inc. (NASDAQ:NUAN) specializes in speech recognition. This software company has defended its market by purchasing smaller rivals. Nuance can’t buy Microsoft Corporation (NASDAQ:MSFT), Google Inc (NASDAQ:GOOG), or International Business Machines Corp. (NYSE:IBM) though, so competition remains a risk factor. Nuance also reported weak results for the fiscal second quarter of 2013. Surprisingly, these results may help make the bull case for Nuance.

Latest Results

Nuance Communications Inc. (NASDAQ:NUAN) admitted that its second quarter went poorly. The voice recognition company achieved 15.9% higher GAAP sales because of its recent acquisitions, but it also reported -5% organic sales growth. Nuance also provided organic sales growth figures for the last six quarters, which show that 2013 hasn’t been a good year so far. Nuance’s organic sales growth for the first quarter of 2013 came in at 8%. The company achieved 12% annual organic sales growth in fiscal 2012.

Nuance Communications Inc. (NASDAQ:NUAN) pointed out three main problems. The company’s recent acquisitions and sales force didn’t produce the results it expected. The third problem might not be a problem at all in the long run. Product and licensing sales shrank from 48% of revenue in the second quarter of 2012 to 41% of revenue in the second quarter of 2013, while on-demand sales rose from 27% to 34% of revenue. Customers who bought software packages from Nuance in the past may have become service buyers instead. Nuance’s recent sales weakness may actually indicate more reliable future revenue.

Mobile Phones

Nuance Communications Inc. (NASDAQ:NUAN) CEO Paul Ricci answered a frequently asked question about a major customer in a recent conference speech. Arik Hesseldahl, at AllThingsD, reported that Ricci finally admitted Nuance created the speech recognition software for Apple Inc. (NASDAQ:AAPL)’s Siri. Nuance’s second quarter earnings announcement mentioned new business or design wins from multiple companies, including Apple, so Nuance’s voice recognition software could keep showing up in future Apple Inc. (NASDAQ:AAPL) products as well.

Nuance Communications Inc. (NASDAQ:NUAN) also has deals with some of Apple Inc. (NASDAQ:AAPL)’s competitors. The Nuance second quarter earnings announcement mentions deals with Research In Motion Ltd (NASDAQ:BBRY)SamsungLG, and other mobile phone makers. Customer diversification makes Nuance look like a safer investment. This company doesn’t just sell software for smartphones, either. Nuance’s largest business segment provides health care software.

Health Care

Nuance Communications Inc. (NASDAQ:NUAN) helps make doctors’ jobs easier. The company provides voice recognition software that helps physicians create electronic health records. Efficiency gains could help physicians earn more money. Ken Terry, at InformationWeek, reported that Nuance had more customers than competitor Dolbey or M*Modal.

Nuance recently improved its medical software, as well. Michele Masterson, at Speech Technology Magazine, explained that physicians have become less satisfied with electronic health care records systems recently, so Nuance updated its Dragon Medical Practice software to address the physicians’ concerns.

A Nuance Communications Inc. (NASDAQ:NUAN) partnership with International Business Machines Corp. (NYSE:IBM) could also result in useful health care software. After IBM’s Watson computer achieved victory on the quiz show Jeopardy, Big Blue put Watson to work in the medical field. In February 2011, IBM announced a partnership with Nuance that would use both Watson and Nuance’s voice recognition software to improve health care. In its second quarter 2013 report, Nuance mentioned that it’s working with an unnamed partner that has strengths in semantic processing and natural language.

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