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Greenberg: Nuance Epitomizes the Reality of Rollups

SAN DIEGO (TheStreet) -- At some point in time a rollup -- companies that grow by acquisition -- can't keep up the pace of acquisitions. It happens to the best of them and when it does you get what I like to call The Reset.

That's what appears to be happening to Nuance Communications (NUAN - Get Report), the voice-recognition company and one of the the longest-running of all rollups. And like many rollups, when the acquisitions stop, so does the growth. Or put another way, the businesses it acquired aren't growing, either. Last quarter revenue growth at Nuance barely budged ahead at 1%. That compares with 8.8% the prior quarter and 27.7% the year before.


Worse, strip out more recent acquisitions organic growth tumbled by 9%. And, for what I believe is the first time, it was negative for each of the company's four segments.

And suggesting the commoditization of speech recognition, Nuance turned in an operating margin of just 2.6%, roughly half that of the quarter before and a fraction of the 12.8% a year earlier.

Perhaps most notable was mobile, which is believed to be the voice recognition power behind Apple's (AAPL) Siri. Mobile's organic growth plunged by 24%. There was a time, just a year or so ago, that Nuance was rising on the hope and hype of mobile, especially the iPhone. (Google's (GOOG) Android and Microsoft (MSFT) use their own voice recognition technologies; Blackberry (BBRY) relied on Nuance but, well, you know how that has worked out.)

Nuance CEO Paul Ricci pretty much conceded the commoditization of mobile on the company's earnings call when he told a caller: "We won't see organic growth, we won't see meaningful organic growth in the mobile phone segment of the overall mobile business this year."

"We will see growth in the automotive and we will see growth in the other segments of mobile but I think not in the Smartphone segment."

But not to worry: In its presentation Nuance said organic growth should turnaround by 2015 and 2016, "achieving mid-single digits in fiscal 2015, as we realize the benefits of the increased bookings growth in fiscal 2015, with a further increase in the growth rate in 2016."A

In the next sentence the company said, "This growth will be broad-based across our divisions...."

To which I say, "will be broad based...?"Not we expect, or should but will?

This from a company that has been playing the manana card for years?

Reality: It's hard enough to say, with certainty, what will happen next month. Two years from now, in this world, is an eternity.

P.S.: This is one of Carl Icahn's most recent investments. In recent months he has become the company's largest holder with a 16.9% stake, bought at higher prices. His investment has sparked hope and hype that Apple will or should buy Nuance. My guess: It's cheaper for Apple to license the technology than buy the whole company.

-- Written by Herb Greenberg

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