Siri software maker Nuance forecasts weak profit

Tue Apr 30, 2013 12:18pm EDT

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(Reuters) - Nuance Communications Inc (NUAN.O), whose software powers the Siri voice feature in Apple Inc's (AAPL.O) iPhone, forecast third-quarter profit below analysts' estimates, hurt by costs related to integrating recent acquisitions.

Nuance shares fell 18 percent to $19.08 in midday trade on the Nasdaq.

The company acquired several small companies in the last year, including VirtuOz, Ditech Networks, J.A. Thomas and Associates, SafeCom, Transcend Services and the Quantim division of Quadramed Corp FRANSQ.UL.

The healthcare-related companies Nuance bought were taking longer to realize revenues than the company had expected and Chief Executive Paul Ricci said this will weigh on results throughout fiscal 2013.

"They acquired a lot of companies over a short amount of time and I think that digestion period has been rocky," FBR Capital Markets analyst Daniel Ives said.

The company is also facing weak demand for its products in Europe, Middle East and Africa. Its margins are falling as the company shifts to a "recurring" revenue model that does not allow for chunky, upfront payments.

Nuance has not been able to demand higher prices from mobile handset companies as competition intensifies and customers look for cheaper deals in an uncertain economic environment.

Nuance expects margins to fall 4 to 4.5 percentage points this year but expects them to improve slightly in 2014. It forecast a third-quarter profit of 30 cents to 34 cents per share, excluding items, compared with analysts' estimates of 49 cents per share, according to Thomson Reuters I/B/E/S.

Nuance said that while it will continue to invest in mobile and healthcare research, it has implemented some cost-saving measures, including job cuts and has slowed planned hiring.

The company, which competes with Adobe Systems Inc (ADBE.O) and products offered by Microsoft Corp (MSFT.O) and Google Inc (GOOG.O), said it had fired a senior sales executive in EMEA and that there would be other changes in the coming weeks.

Ives said that the company was very successful over the last decade, but had failed to execute well over the past few quarters and investors were getting restless.

"Its been a roller coaster ride for investors and today a lot of investors want to get off the roller coaster," he said.

Nuance shares have slipped 6 percent in the past 12 months.

PLACATING INVESTORS

The company said it would buy back $500 million shares, a move that Mizuho Securities analyst Joanna Makris said was an effort to placate investors.

"Management is under pressure to explore options that create more shareholder value. I would not be surprised if Nuance divests non-strategic portions of its business," she said.

Nuance has often been the focus of takeover rumors and activist investor Carl Icahn disclosed a roughly 9.3 percent passive stake in Nuance earlier this month.

"We think the weakness that the shares likely will encounter today could lead to two things - investor Carl Icahn will go from passive to active or the recent chatter of a strategic alternative becomes even more of a possibility," Oppenheimer analyst Shaul Eyal said.

Makris said Icahn will force some structural changes, a move she believes is necessary at this point.

Excluding items, Nuance earned 34 cents per share in the first quarter. Costs rose 13 percent. Adjusted revenue rose 16 percent to $484 million.

Analysts on average expected an adjusted profit of 40 cents per share, on revenue of $516.5 million, according to Thomson Reuters I/B/E/S.

(Additional reporting by Aditya Kondalamahanty in Bangalore; Editing by Supriya Kurane)

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