Nuance Communications, Inc. (NUAN)

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A provider of speech and imaging solutions for businesses and consumers. The Company's technologies, applications & services are transforming the way people create, use and interact with information & make the experience of its end users more convenient.

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Avatar TheGarcipian (98.83) Submitted: 10/13/07 1:27 AM : Start Price: $10.60 NUAN Score: 40.66

I must admit to being a bit slow on providing a pitch here (since I only recommended this stock almost 11 months ago!), but here it is... I've always liked this stock from the moment Bill Mann recommended it in January 2006. I thought they had (and still have) an interesting acquisition model, and having lived through several acquisitions in my high-tech job, I know that these acquisitions have a success rate very similar to that of marriages in the USA: 50%. The fact that Nuance has been able to continue its acquisitions and have those add to the bottom line so quickly is testament to the excellent management here. The numbers are a mixed bag (but not nearly as hard to figure out as PRAA's), but I half-expected that for a business that is building out and trying to gain market share at the expense of profits. While they are cash-flow positive, the margins are either negative (Profit Margin = -3.2% as of 10/12/07) or in the single digits (Operating Margin = 8.2%). They've recently increased their debt load (D/E = 59%), and their EnterpriseValue-to-EBITDA is very high at 45.4. None of these numbers are good by themselves, but when coupled with this management's talent for buying & integrating key technologies and given that they have a wad of cash equal to one-third their annual revenue, I think we will see rising margins, growing EPS, and generally positive improvements in the Balance and Income sheets, all of which should continue to raise the stock price. The key, however, is management. Let's hope that they make no mis-steps.

(Disclosure: I've owned NUAN since June 2006.)

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Avatar Winterwhite19 (< 20) Submitted: 12/28/07 2:42 PM

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You did well! Doubled this past year. Good job.

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Avatar TheGarcipian (98.83) Submitted: 12/30/07 11:43 PM

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Thanks, WW19. My hopes are that Nuance's management will pause for a bit longer now to completely integrate its acquisitions this past year and have those add directly to the bottom line for the next 2-3 quarters. I'd like to see its RoA and RoE numbers both move up from their current values of 1.4% and -1.9%. They've got quite a bit of debt to work off now (current D/E=1.033). Given that the economy will continue to head south throughout 2008, I hope that Nuance's management will focus on paying down that debt before making any more acquisitions. I've been buying little bits of NUAN throughout this past year, placing my bets right alongside the 16.88% of shares that are owned by corporate insiders. I think in the near term the stock will cool for a bit, but with a Forward PE of 19.9 and PEG of only 1.09 currently, I'm hoping that cooling won't last long. Fool on!

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Avatar TheGarcipian (98.83) Submitted: 12/30/07 11:45 PM

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Thanks, WW19. My hopes are that Nuance's management will pause for a bit longer now to completely integrate its acquisitions this past year and have those add directly to the bottom line for the next 2-3 quarters. I'd like to see its RoA and RoE numbers both move up from their current values of 1.4% and -1.9%. They've got quite a bit of debt to work off now (current D/E=1.033). Given that the economy will continue to head south throughout 2008, I hope that Nuance's management will focus on paying down that debt before making any more acquisitions. I've been buying little bits of NUAN throughout this past year, placing my bets right alongside the 16.88% of shares that are owned by corporate insiders. I think in the near term the stock will cool for a bit, but with a Forward PE of 19.9 and PEG of only 1.09 currently, I'm hoping that cooling won't last long. Fool on!

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Avatar TheGarcipian (98.83) Submitted: 12/30/07 11:46 PM

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Thanks, WW19. My hopes are that Nuance's management will pause for a bit longer now to completely integrate its acquisitions this past year and have those add directly to the bottom line for the next 2-3 quarters. I'd like to see its RoA and RoE numbers both move up from their current values of 1.4% and -1.9%. They've got quite a bit of debt to work off now (current D/E=1.033). Given that the economy will continue to head south throughout 2008, I hope that Nuance's management will focus on paying down that debt before making any more acquisitions. I've been buying little bits of NUAN throughout this past year, placing my bets right alongside the 16.88% of shares that are owned by corporate insiders. I think in the near term the stock will cool for a bit, but with a Forward PE of 19.9 and PEG of only 1.09 currently, I'm hoping that cooling won't last long. Fool on!

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Avatar bluedome (< 20) Submitted: 4/02/08 12:38 PM

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Where are you getting the forward PE and PEG numbers? This company only has 2 positive quarters
in the last 5 years, and the trend isn't even improving in losses.

And one more question, who are they trying to win market share from? They are the leader in
voice. I don't understand why they couldn't raise prices enough to start making a slight profit,
instead of just letting the losses go on forever.

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Avatar ose12 (28.91) Submitted: 4/23/08 4:01 PM

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yeah a good one. but no dividend. time to take ltgain & turn mine into MO for about the same price & swell dividend. NUANCE has been great but is now near it's historical high.

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Avatar TheGarcipian (98.83) Submitted: 6/19/08 4:37 PM

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Good timing on your call, ose12, as I see that NUAN did hit a local high back on 4/23/08, the day you posted your reply. But I'm in it for the long haul. And boy, did I get good news today. Citigroup analyst Brent Thill issued his estimate which essentially reiterated what Nuance has been saying all along: "June quarter revenue of $232 million and pro forma EPS of $0.21 in line with both the company’s guidance and the Street consensus."

http://blogs.barrons.com/techtraderdaily/2008/06/19/nuance-shares-rally-citi-adds-to-top-picks-live-list/?mod=yahoobarrons

He also noted that he expects the stock to reach $24/share in the next 12 months. Personally, I think it's got enough potential to go just beyond that threshold, but I'll take $24 a share, especially right now when the stock got some recent "unloving" and slid down to $16 and change. It just underlines what we Fools have known for some time now: the stock is undervalued right now.

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Nuance Communications, Inc. (NUAN)

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