“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
NUANCE COMMUNICATIONS INC. $17(Nasdaq symbol NUAN; Manufacturing & Industry sector; Shares outstanding: 285.4 million; Market cap: $4.9 billion; No dividends paid; Takeover Target Rating: Medium; www.nucance.com) specializes in speech and imaging technology. Its systems enable voice-activated services over a telephone by transforming speech into text and allowing users to control devices and software by voice.
The company’s products use several advanced technologies, including artificial intelligence, cognitive science, and machine learning. Together, they handle about 16 billion self-service transactions a year.
Nuance sells its products through software and hardware vendors, resellers and telecom carriers. It also has its own salesforce and e-commerce website. The U.S. accounts for 70% of its sales.
Nuance Communications:
Based in Burlington, Massachusetts, has 11,600 employees in 80 countries
More than 60 car brands, including the 10 largest carmakers, use Nuance products
90% of U.S. hospitals use its software
The company’s revenue rose just 1.3%, from $1.92 billion in 2014 to $1.95 billion in 2016 (fiscal years end September 30). Revenue then dipped 0.5%, to $1.94 billion in 2017, due to a computer virus (called NotPetya) that infected its systems. Revenue rebounded 5.8% to $2.05 billion in 2018.
Nuance’s losses improved from $0.47 a share (or a total of $150.3 million) in 2014 to $0.04 a share (or $12.5 million) in 2016. With the costs to remove the NotPetya virus, the company’s losses worsened to $0.52 a share (or $151.0 million) in 2017. A writedown increased its losses to $0.55 a share (or $159.9 million) in 2018.
If you exclude all unusual items, the company’s earnings rose 13.3%, from $1.05 a share (or $309.0 million) in 2017 to $1.19 a share (or $351.9 million) in 2018.
In its fiscal 2019 first quarter, ended December 31, 2018, Nuance’s revenue rose 6.5%, to $493.7 million from $463.6 million a year earlier. If you exclude the contribution of acquisitions, revenue improved 2%.
The company continues to shift from selling its software as a one-time purchase to a subscription model. In the latest quarter, recurring revenue accounted for 77% of the total.
Earnings before unusual items jumped 29.6%, to $87.1 million from $67.2 million; due to fewer shares outstanding, per-share earnings gained 30.4%, to $0.30 from $0.23.
Nuance’s research spending rose 3.4% in the quarter, to $68.3 million (or 13.8% of revenue) from $66.1 million (14.8%) a year earlier.
The company ended the quarter with cash of $431.1 million and long-term debt of $2.2 billion, or a somewhat high 45% of its market cap.
As a result of a strategic review, Nuance has agreed to sell its imaging software business for $400 million. It will also spin off its automotive operations, which makes software to run car information/entertainment systems. Nuance shareholders will only be liable for capital gains taxes on those new shares when they sell them. The company expects to complete the spinoff by the end of fiscal 2019.
Nuance will then focus on its health-care and enterprise operations. Its smaller size also adds to its takeover appeal.
Including the automotive business, the company will probably earn $1.23 a share for all of fiscal 2019. The stock trades at a moderate 13.8 times that estimate.
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