I just read an interesting analysis by Ketul Kirtikumar on seekingalpha.com.
Ketul claims, “The acquisition machine which fueled growth at Nuance might be slowing down due to the high debt that Nuance Communications (NUAN) has accumulated in the last two years.” He states their organic growth has been slowing while execs and insiders have been unloading shares.
I have mixed feelings about Nuance ceasing its aggressive acquisition strategy. Nuance’s acquisitions have created a wonderful consolidation in the embedded space, virtually removing all of Sensory’s competitive threats and allowing Sensory to be the only remaining major player with any substantive size in the embedded speech market. A few years back it was ART, Voice Signal and Sensory. Now ART and Voice Signal have been merged/acquired into Nuance. Hey, I like that!
Nuance has a habit of suing companies before acquiring them. This is the reason I’d be glad if they stopped acquiring. Patent infringement lawsuits are such nasty things. Sensory has had to build an arsenal of patents primarily as a defensive measure (even though Nuance is our friend and customer). Suing a company to acquire them seems kind of like spitting on girls to try and get a date.
The latest lawsuits I read about Nuance were with Zi Corp and with Vlingo. Zi is an intelligent text company that competes with Nuance’s Tegic (another acquisition). Zi and Tegic already battled it out years ago on patents and after a long bitter feud they had it all settled, guess not. Vlingo uses IBM’s speech technology, and it appears the lawsuit could be Nuance’s awkward way of courting, or possibly just revenge because a Nuance former CTO left to start Vlingo. Who knows??? I just like battles in the marketplace a lot more than in the courtroom.
So, the really interesting thing about Ketul’s article was the revenue numbers he showed for Nuance’s embedded handset business. It was close to $200M for 2008. Huh??? My wildest guesses from a few years back would have been Tegic was doing $40M, Voice Signal $20M, ART and other Nuance stuff might have totaled another $20M. So how did putting it together grow it from $80M a few years ago to just under $200M in 2008? I don’t think there’s been that much growth in the embedded market. Per unit royalty rates have probably dropped with adoption rates. $193M is like Nuance getting .15 or .20 on every handset sold everywhere in the world. I don’t think so. Let’s see, 30 or 40 cents on half the handsets sold? Nope.
Interestingly Ketul says “Nuance’s embedded solutions are used for voice command in embedded devices and are clearly market leaders in the segment. However, voice command embedded solutions haven’t moved beyond the visionary phase of the technology adoption cycle and show no signs of crossing the chasm at its current rate of usage.” He shows a graph of technology adoption lifecycle that implies Nuance has about a 10% penetration (sounds OK to me for speech, but maybe a little low for adaptive text). So if 2008 has a 1.2B unit market for headsets, and Nuance has penetrated 120M units (10%), then that would imply they are making roughly $1.60/unit. I don’t know any handset guys that would pay even close to that for intelligent text and voice dialing. Go figure!!!
So, something is strange in analyst land, but I hope Ketel is right that the lawsuit to acquisition spree is coming to an end!