Monday, December 31, 2012

Synchronoss Technologies Takes Dead Aim At Apple, Amazon, and Google With NewBay Acquisition

Synchronoss Technologies (SNCR) does a lot of the heavy lifting for your mobile devices, but remains anonymous. They have long been "the company behind the company" where it comes to smartphone and tablet synchronization. Although they will achieve significant growth with their current offerings because of the proliferation of handheld computers domestically, they are looking for a bigger piece of the action.

Last week, Synchronoss officially entered a border war with Apple (AAPL), Amazon (AMZN), and Google (GOOG) with their purchase of NewBay from Research In Motion (RIMM) for a discounted $55.5 million dollars. RIM initially bought NewBay for $100 Million a little over a year ago to buttress international cloud services for their Blackberry mobile phones, but the company has since fallen on hard times.

It was a straightforward business proposition, and showed good horse sense for Synchronoss to pay cold cash for a company that is more than a tuck-in technology, but part of their overall strategic growth plan for the next five years. Synchronoss is not waging this war alone, they are partnering with telecom carrier heavyweights spanning the globe.

Until the acquisition, Synchronoss was a minor player in the fray with domestic telecom carrier Verizon Wireless (VZ) rolling out the Synchronoss ConvergenceNow Plus+ cloud platform. AT&T (T) is also testing the service. It must be noted that AT&T and Verizon Wireless are major contributors to the Synchronoss revenue stream. For more information about the Synchronoss bread and butter technologies, refer to a previous article.

Now, with NewBay on board, Synchronoss will be doing business with established European clients Vodafone (VOD), Orange, Swisscom, and T-Mobile; additional U.S. customer US Cellular; plus Asia/Pacific partners LG Electronics and Telstra. It's a small world after all.

To shed some light on the expanding Synchronoss family, the company announcement states:

NewBay is a leader in cloud services, enabling mobile operators and service providers to deliver content experiences across connected devices such as smartphones, tablets, PC’s and TV’s.
Tiernan Ray of Barron's adds to the conversation:
NewBay is what analysts call a “white label” cloud computing services provider, which can be branded by phone companies to give cloud services to customers.
Synchronoss now crosses swords with a who's who of Silicon Valley. It puts the company in a position to compete against Apple's iCloud, Amazon's Cloud Drive, and Google's cloud initiative.

To provide the infrastructure that enables this strategy is a newly formed partnership with Terremark. Terremerk blankets the globe with their managed hosting, colocation, data storage and cloud computing services. They house data centers in North America, Latin America, Europe and the Asia-Pacific region. What makes Terremark interesting is that they are wholly owned subsidiary of Verizon. This is where the lines get blurred because not only has Synchronoss signed a five year contract with Verizon Wireless, but Vodafone owns 45% of Verizon Wireless.

Although the mobile device manufacturers drew first blood in regards to data back-up in the cloud, it is my belief that the carriers with partners like Synchronoss are formidable opponents. The telecom giants want a bigger piece of the pie in the very lucrative, high growth smartphone and tablet market. They're already getting their money's worth from expensive voice and data plans, but are also being gouged by the likes of Apple with subsidized smartphones.

They carriers have already crossed the line, so the battle is on.

Saturday, December 22, 2012

Immersion Corporation: Paving The Way In Force Feedback Technologies

Some descriptions in this post were paraphrased from the most recent Immersion Corporation 10-K.

On December 17th, Seeking Alpha's Market Currents posted a note that IBM's (IBM) R&D Laboratory expects haptic technology to play a big role in our digital devices within the next five years. Haptic technologies allow people to use their sense of touch more fully when operating a digital device. Video game players may be familiar with the technology when they feel a gun recoil, an engine rev, or the crack of a bat meeting a ball.

Small cap Immersion Corporation (IMMR) is big in the sector. Because of my preference for investing in mobile pure plays, Immersion's 1,200 patents, and their position as kingpin in force feedback, the remainder of this article will focus on the smaller organization.

Whether you call it haptic, force feedback, touch feedback, or tactile feedback, the technology is here to stay. Gamepads, joysticks, mobile phones, rotary controls and touchscreens are all beginning to incorporate the science into their products. Haptic effects can be used in alerts, e-mail, games, messages, ringtones, touchscreen interactions, and other user interface features to add information or identification, signal status or message arrival.

Immersion is the company that licenses haptic technologies to manufacturers who use them in products sold under their own brand names. Two examples are Microsoft's (MSFT) Xbox and the SONY (SNE) Playstation. However, it's mobile communications where Immersion Corporation will potentially make the most money. Their licensees in this space currently include Nokia (NOK), Samsung, and LG Electronics. Immersion Corporation is an Android and Windows 8 play. Apple (AAPL) is not part of the equation, although they use haptics in iPhones.

Immersion was founded in 1993, and went public in 1999. Their gee-wiz technology has been around for awhile, but hasn't done much for shareholder value. In 2001, it crossed the tape as high as $60, but has since been cut down to size as investors ran for the exits. It currently sells near multi-year lows at $6.50. In fact, only a month ago it was on death's doorstep selling at $4.15, but was thrown a stock-saving lifeline when it won a patent litigation with Google. The stock rose 50% almost immediately.

It must be noted that the patent litigation with Google only covers Google's Motorola brand of smartphones, not the entire Android universe. Although a battle worth fighting for, the war isn't over where patent infringement is concerned. In fact, it's a big problem for Immersion. Many device manufacturers that include Immersion's technology in their products have cut some corners, and haven't ponied up the money that is owed the company.

I think this a huge sticking point for them, and why the stock has been left unresponsive and unconscious for the past few years although it's been invigorated recently. Vic Viegas is the CEO of Immersion and he addressed the issue during the Q3 conference call:

We believe there have been close to 400 million basic haptic phones that are unlicensed that have been shipped, and it's those phones that we expect to monetize and turn into revenue. But I would say that the more important aspect of our ITC (International Trade Commission) action and the enforcement of our basic haptics is to establish the value of this IP, and generate the ongoing revenue from continued sales of these basic haptics products.
That reference to the International Trade Commission is the border war with Google's Motorola brand which has been already been won by Immersion Corporation. However, I believe the important point in the quote is that there are 400 million haptic enabled phones which may or may not be beneficial to Immersion's top and bottom lines. Forty-four percent of Immersion's revenues stem from the mobile division, and until they can collect on a regular basis, they may continue to take a financial beating. Litigation is an expensive process.

Paul Norris is CFO and right-hand man to Mr. Viegas. He discusses some of the ramifications of the intensive legal proceedings:

It’s always tricky to predict legal expense with a lot of precision given that much of the expense can be a function of the other parties who are participating in the litigation.
Although these legal actions can be a detriment to the company, they can also be a positive in that investors like small business' with deep patent war chests. The recent victory over Google could keep propelling the stock higher. Larger organizations like patent rich companies too, when looking to buttress their own portfolios in the form of a buy-out.

Another thing I like about the company is that it is primarily owned by institutions, 78%, and gets little to no coverage by analysts. Once the sell side community comes back into the fold, the stock may spike higher as initial analyst coverage and upgrades ensue. They say you only get one chance to make a first impression, but the company may be ready for a second act.

Immersion's business is seasonal, with much of the sales being done in the 4th quarter when many smartphones and game consoles are sold. There's also not much of a short float on the equity, only 5.6%, so the street thinks it's fairly valued. Traders may find this a nice entry point. However, I'm more long term in my approach, and my belief is that the company is expensive when we break down the numbers.

Immersion Corporation is projected to break even with earnings the 4th quarter of 2012, but are slated to lose money for the year. According to Yahoo Finance, for the full year 2013, the company is only expected to make $.16/share. That's a P/E Ratio of 40 for the full year with revenues increasing by 24%. That's not an apples to apples comparison, but they are growing incrementally, just like the technology. If revenues were increasing at 50% annually, I'd say that would be a different story.

This could be a well-timed investment if you are looking for a short term trade. Immersion may have the right formula for success as they attempt to re-create the magic that pushed their stock price to $60. However, with the fiscal cliff looming, a Beta of 1.7, a lofty P/E Ratio, and no guarantee of further patent wins, I think this stock can drift back down to the $4 range sometime in the next two quarters.

Tuesday, December 11, 2012

Nuance Communications: The Epicenter Of An Evolution

On December 6th, Nuance Communications (NUAN) held their Analyst/Investor Day Presentation, and shed a lot of light on their prolific catalogue of products for 2013 and beyond. Artificial intelligence. Voice biometrics. Collaborative filtering. Speech recognition. Predictive models. Tech-savvy terminology like this is peppered throughout the transcript. Although Nuance has established a beachhead in voice recognition technologies, CEO Paul Ricci and his cohorts believe there is a paradigm shift currently underway. This was the crux of the presentation.

Just like investing, speech recognition is less than a perfect science. It's a complex and multidimensional business. Nuance is arguably the top company in the sector. If we peel back the layers to examine the behind-the-scenes processing of Apple's (AAPL) voice generated Siri platform, you'll find Nuance Communications at work. It's undetermined whether iPhone aficionados have completely bought into the technology, but in increments, the science is improving with the advent of intelligent systems. I utilize their Dragon Dictation application on my iPhone, and for lack of a better expression, it works.

Nuance is engaged in three primary markets: mobile & consumer, enterprise self-service, and healthcare. Although I'll be touching on the medical and corporate call center aspects of Nuance's business, the primary thrust of this article will focus on the mobile and consumer division. This is because although all three segments are thriving, it's the mobile and consumer space that is growing the fastest, and may elevate the company to elite status.

Right off the bat, CEO Ricci states that Nuance has a privileged position across most of the leading smartphone platforms in the world. The company is very excited to have cemented a series of agreements with Samsung (SSNLF), and they are going to extrapolate that smartphone leadership position to other connected devices. Most notably televisions, desktops, laptops, tablets, and automobiles. Mr. Ricci expounds on this:

We're going through a paradigm shift. And that paradigm shift is towards more intelligent systems; virtual assistance; interactive systems that incorporate speech, natural language processing; some amount of knowledge domain and reasoning, and that paradigm shift is moving. It was first articulated in the smartphone market is moving to incorporate platforms and products across the mobile consumer and electronics industry.
This computer science is called "Deep Belief Networking", where neural networks are applied to speech recognition and other pattern-recognition problems. In essence, algorithms are utilized to synthesize all of the user inputs on a communications device. Previously, it was cost prohibitive, and the technology just wasn't there. You needed a mainframe to crunch the numbers. However, with cloud computing becoming the norm, as opposed to an outlier, the technology is moving forward. Nuance is putting a full-court press on the science to maximize user experience on multiple devices.

Vlad Sejnoha is one of Mr. Ricci's go-to guys and explains the process:

We try to be efficient about the use of resources to optimize the user experience by tapping into the cloud transparently to the user. So our natural language understanding framework is flexibly distributable across the cloud in multiple devices. This is very important because increasingly, our users expect a continuity of experience across devices. Whether they're interacting with applications on their phone, in the car or increasingly on their TV.
What's happening is that as more and more of your devices are connected to the cloud, the sample size of what your inputs are become much larger, and enables not only the end user, but multiple users to improve the process. This includes not only speech recognition capabilities, but other input procedures like manual data input on the keyboard. Mr. Sejnoha goes on to say:
So among the many input modalities we support is tracing on the keyboard, we call it Swiping, where we use predictive algorithms that map the gestures onto character sequences and also perform autocomplete. As every user uses Swipe, the information goes up into the cloud where it's aggregated and mined and we discover new terms, new language patterns and immediately update the language model for that user.
This is not a half-baked idea. However, we all know that human behavior is not very logical, and although Nuance Communications is making improvements to previous input technologies, instantaneous gratification may not be in the cards for awhile. You still may be frustrated with some of Siri's capabilities. It's a slow motion process. Let's examine the company's three business segments individually to determine what is in store for 2013.

Mobile and Consumer

Mike Thompson is the General Manager of the mobile division. Here are some bullet points as to what the company's strong assets are for their most visible division for the next few years.

  • Nuance is at the epicenter of an evolution. Almost all sophisticated mobile devices today are shipping with some kind of capabilities in the areas where Nuance participates. And the outlook for that is only increasing.
  • The Mobile and Consumer Division is built on the Dragon family. It's the company's most mature market.
  • On desktop, the original Dragon NaturallySpeaking has been historically an aftermarket product. That's changing dramatically. The desktop, laptop, Ultrabook space has converged with mobile phones and tablets. The entire Dragon desktop portfolio is being optimized and driven towards an OEM business. This is a major shift. It'll include embedded technologies and connected technologies.
  • We launched Dragon TV in January of this year. We have now shipped 750,000 voice-enabled smart televisions. The best televisions at Costco (COST) or any other retail store, you go to the high end ones, like Samsung Smart TV, those have voice recognition; LG, they have voice recognition. That market is going to continue to grow.
  • This is a picture of the cloud. Dragon cloud traffic was zero in 2009, when we launched our first Dragon dictation downloadable application. We have grown to, and done five billion cloud-based transactions since Q1 2010. And we expect that this number will, based on the curve, actually grow even faster.
  • We are the only company in the world with the diversity of the following things: we process traffic from IOS, Android (GOOG), RIM (RIMM), Symbian, many, many different flavors of Android.
The mobile and consumer division has growth between 25% and 30% each year for the past four years. It's important to note that back in 2009, they had no connectivity revenue at all.

Enterprise

Robert Weideman is in charge of the enterprise area of operations. Think call centers, or, automated customer service solutions. As Mr. Weideman noted: "You don't want to frustrate customers with speech recognition that doesn't know what you're saying. You also don't want a robotic voice talking back to you.". I thought it was interesting that 60% of all phone calls to contact centers emanated from mobile devices.

Because of global partners like Avaya, Cisco (CSCO), Huawei and Genesys, Nuance is able expand their language portfolios on a worldwide basis. Natural Language Understanding and voice biometrics help the company maintain a lead in international automated customer service. Last year the division achieved 12% revenue growth. Seven percent of that growth was organic.

Health Care

Nuance has established an indisputable market-leading franchise in front-end speech and capture. With physicians, this dovetails into adapting Dragon Medical to take advantage of government subsidies from the HITECH Act. The HITECH Act is part of the US Government Stimulus Plan where almost $30 billion has been slotted to reimburse physicians and hospitals for adopting electronic health records (EHR) in their practices. With a current minuscule market penetration of 10%, the US Government's goal is to equip 90% of doctors with electronic health records by 2019.

Janet Dillone heads the medical division of Nuance. She reports that 2012 had very strong double-digit organic growth, a top-line of $670 million, and a three year CAGR of 20%. This was helped by strong relationships with Cerner (CERN), the largest healthcare IT company in the world, and Epic, one of the fastest growing healthcare IT companies globally.

Conclusion

This was a dense and meaty report. Far too much information to be effectively covered in a few short paragraphs. Nuance's public profile has recently been elevated with the inclusion of Siri in the newer iPhones. It initially goosed the stock, but it has since come down to more reasonable valuations.

Tim Cook, Steve Jobs hand-picked successor at Apple recently nixed Google's (GOOG) mapping application, so continued relationships with Apple are not guaranteed. However, my take is that because of the public outrage from jettisoning the Google app, Apple will probably stick with the technology leaders going forward for native applications. Nuance certainly fits that bill.

I think the planets are aligned for Nuance to make a multi-year run. Just utilizing regression analysis, Nuance looks primed to continue its slow and steady ascent on the stock charts. The going rate for the equity is $22, very close to its 52 week low of $19. The 52 week high was $31. Crunching the numbers courtesy of Yahoo Finance, we can see that its projected 5 year CAGR is 16.5%, and the current P/E is 11.5. On a PEG Ratio metric, that is a bargain.