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Nuance Communications Inc. (NUAN): Carl Icahn is Getting More Bullish on This Voice Recognition Business

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Billionaire Carl Icahn has recently increased his exposure to the voice and language solution provider Nuance Communications Inc. (NASDAQ:NUAN) through derivatives. He reported that until now, his associated companies and funds owned more than 16 million shares in call options, with an exercise price of $12.30 expired February 2015, and sold the same amount of shares in put options, with the same exercise price and same settlement date.

The Long Synthetic strategy

Nuance Communications Inc.By owning call options and selling put options with the same exercise price and same settlement date, Carl Icahn has used long synthetic strategy. Purchasing call options gives Icahn a right, but no an obligation to buy Nuance Communications Inc. (NASDAQ:NUAN) shares at $12.30 per share. It is one form of leverage, allowing Icahn to buy the stocks with less capital at risk. With the nearly two years until expiration, the call options give him a lot of flexibility over short-term stock market volatility.

At the same time, Carl Icahn wrote put options on the same amount of shares, same exercise price with the same maturity date. Writing put options gives him premium to somehow cover the premiums of the call he purchased. However, writing put options means that Icahn has obligations to buy back Nuance Communications Inc. (NASDAQ:NUAN) shares when its share price falls below $12.30. Interestingly, another catch is that Icahn bought American call options but sold European put options. As American options could be exercised at any time before the expiration date, Icahn could decide whether or not he would like to actually own more than 16 million Nuance shares before February 2015. As European options could only be exercised on the maturity date, Icahn minimizes the risk that Nuance shares got sold to him when its share price falls below $12.30 before February 2015.

A cash cow with growing operating performance

Nuance Communications Inc. (NASDAQ:NUAN) is considered the leader in voice and language solutions for the use in many industries, including healthcare, mobile and imaging markets. In 2012, around 39% of its revenue came from the Healthcare segment ,while the Mobile & Consumer segment ranked second, accounting for 29% of its total revenue. For the full year 2012, Nuance had quite impressive growth. While its revenue increased by 25%, the growth in the EPS and net income were much higher, at 27% and 29%, respectively. The company was also cash cow. In the past twelve months, Nuance produced nearly $500 million in operating cash flow and $444 million in free cash flow. At $18.10 per share, it is worth more than $5.7 billion on the market. The market values Nuance at around 12.8 times its free cash flow.

Its technology powers Siri

Nuance Communications Inc. (NASDAQ:NUAN) seems to be a good play for technology investor in the speech recognition field. Recently, the company’s CEO Paul Ricci commented that Siri, Apple Inc. (NASDAQ:AAPL)’s voice recognition software was powered by Nuance. He said, “We’re a fundamental provider for Apple.” Apple Inc. (NASDAQ:AAPL) acquired Siri on April 2010 to put its foot into voice-activated search on Apple’s devices only. In the recent WWDC conference, Apple announced that it has already updated Siri, with Twitter and Wikipedia integration, Bing as a default search engine, and being part of the new iOS in the car. However, according to VentureBeat.com, Apple’s Siri scored only 16.3 on the total 100 Intelligence Index score, far away from Google Inc (NASDAQ:GOOG) and ChaCha. ChaCha ranked the first with very high Intelligence score of 72.8 while Google Inc (NASDAQ:GOOG) ranked the sixth with the score of 50.1. The ChaCha CEO commented that Siri was the worst in terms of providing high quality answer within seconds. He said, “From my perspective, Siri needs to be able to answer the kind of questions that we ask when we’re driving or in the mall … the kinds of questions do people really ask, as opposed to giving you search results, just like a search engine.”

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