On January 21, Nuance
surprised investors by raising its EPS and revenue guidance for the first
quarter ending in December 2013. The company raised its EPS guidance to $0.23
to $0.24, from an earlier guidance of $0.18 to $0.21. The increased revenue
guidance stands at $467 million to $471 million. This has created optimism
around the stock after a dismal performance in 2013.
Looking into 2014, the
imminent shift to ICD-10 in the health care industry and the increasing use of
voice biometrics in financial services are two potential accelerators of growth
for the company’s top-line.
Shift from ICD-9 to ICD-10
in health care industry
An important trend in the
health care sector is the impending implementation of coding standard ICD-10 in
October 2014. ICD-10 includes five times more codes than ICD-9 contains. The
new coding standard will significantly increase the number of codes used in
billing systems once it is effective. As a result, documentation will take more
time, increasing labor costs. This will drive health care companies to automate
documentation and boost the revenue of providers of clinical information
management (CIM) solutions.
The increasing need for
automation in the health care industry has increased demand for Nuance’s CIM
solutions. The company generated revenue of more than $100 million in
fiscal-year 2013 for its CIM solutions and added 35 new customers. In
fiscal-year 2013, the company introduced Clintegrity, an automation solution
that supports the industry’s transition to ICD-10. This has helped the
company’s existing customers that adapted ICD-9 in shifting to ICD-10 as well
as its new customers.
The potential for the
company’s CIM solutions is high because most health care providers have not yet
implemented ICD-10 and are required to implement it by October 2014.
Implementation of ICD-10 increases the demand for the company’s CIM solutions
as customers increasingly opt for automation. Apart from that, this will also
make the company’s ongoing transition smoother from a license-based revenue
model to an on-demand revenue model as the company provides its Clintigrity
solutions as a combination of on-demand services and term licenses.
Financial institutions are
increasingly deploying voice biometrics
The demand for voice
biometrics is growing from financial institutions, as they increasingly view it
as the best way to secure customer accounts and financial information. Apart
from security, voice biometrics also increases customer satisfaction and
reduces costs associated with customer care. This increasing usage of voice
biometrics is beneficial to Nuance.
Nuance successfully
implemented its FreeSpeech voice biometrics for the institutions such as
Barclays and Tatra Banka last year. After implementing voice biometrics,
customer satisfaction increased at Barclays, while a reduced conversation time
of 5% lowered costs. Another implementation at Tatra Banka reported that
customer identification now takes 10 to 15 seconds, which has significantly
improved customer satisfaction by 20% and secured customer transactions.
On Dec. 6, 2013, ING Bank
Romania implemented Nuance’s voice biometrics for customer authentication. ANZ
bank had also tested Nuance’s voice biometrics, indicating a growing use of
voice biometrics in the financial industry. Nuance dominates the voice
biometrics market with more than 35 million voice prints deployed, giving it
around 80% of the total market. This gives the company an advantage in
attracting more customers to its voice biometrics services as financial
companies deploy them. The global voice biometrics market for the financial
sector is expected to increase from $200 million in 2012 to $750 million by
2015. As the voice biometric market leader, Nuance will benefit greatly from
the growth in this market.
The company’s executive
compensation is too high
Compensation for Nuance
executives is extraordinarily high compared to its operating income. In
fiscal-year 2013, Nuance’s executive compensation was $43 million, almost 90%
of operating income. The management is rewarding itself with hefty
compensation.
This could change in the
future, with Carl Icahn’s recently increased stake in Nuance to 19%. He has two
members appointed on Nuance’s board of directors from his company Icahn
Enterprises L.P. As a major shareholder, Icahn will push for changes that will
increase shareholder value to increase the value of his stake. This may result
in cost-cutting by management including a possible reduction in executive pay.
Conclusion
Nuance reported losses for
the last four quarters, resulting in negative earnings of $115 million for
fiscal-year 2013. As a result, the company’s stock fell more than 30% last
year. However, the company has strong growth prospects for 2014.
The company’s leadership in
the voice biometrics industry will help it benefit from the growing use of
voice biometrics in the financial industry. Apart from that, the growing need
for automation in the health care industry will help the company’s health care
segment grow. Meanwhile, Icahn will push the company’s management to cut costs,
which will increase operating income.
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