Nuance: Can you hear me?

Nuance's quarter sounded better, but can they repeat the
performance? Organic growth was up 36% year over year; when you
add the purchased companies it was up 47%. Integration of Nuance
and ScanSoft appear to be working out better than expected. In
my mind this was much better than expected. The growth and
profoma profit showed a robust surprise. Before the merger,
Nuance and ScanSoft were major factors in the speech recognition
market. Since they merged it appears that the industry has
become less competitive. With less competition there is less
need to discount to win the deal.

The company stated that this current quarter would still have
some digestion issues. This was the first quarter that
speech-recognition revenues have exceeded the slower growing
scanning business. Usually during the first quarter of a merger,
a company has real integration problems. Seldom does a company
report that growth is well above the market and organic growth
is inline with the industry. Voice business services will be
one of the fastest growing value chain segments through 2008,
with a CAGR of 35%. Source: Research and Markets November 21,
2005. The Nuance Speech Recognition Market Network Call Centers
Embedded Mobil Devices Automotive Hands Free Devices Nuance
Company forecasted flat gross margins and believes it will be
able to reduce costs by taking out redundancies caused by the
mergers. For 2006, it forecasts $315-325 million in sales. They
also forecast 29-31c per share in profit. With a forward PE of
22 and 3.65 times sales, this appears to be a company with a low
valuation, especially with a leading position in a 35% growth
industry.



Conclusion More and more states are requiring hands free
calling when driving a car. The networked based voice
recognition call center is often rated higher than operators or
press 1 for x and press 2 for y maze solutions. When you
consider that it often saves companies money significantly over
time, it's understandable why the industry receives such a high
growth forecast.

It appears that voice recognition is starting to receive growth
from the upturn in the high-end cell phone market along with
others. Keeping in mind that some integration issues still need
be worked through, if Nuance can achieve organic growth at
industry levels, in my opinion, this company could be valued
significantly higher.

We offer complimentary email @ research services
[urlhttp://www.durig.com/page5.html[/url

Discolsure I own Nuance in discretionary clients portfolios and
in my own account. Past performance is not a guarantee for
future returns especially since we were rated #2 U.S. Equity,
Large Capitalization Blend, Ranked by 1 year annual return 4th
Quarter 2004, By Money Manager Review