Nuance: Just What the Doctor Ordered

According to the report ‘Medscape National Physician Burnout & Suicide Report 2020: The Generational Divide’, released in early 2020, half of all physicians in the United States suffer from some signs of burnout. Many doctors are exhibiting symptoms of depression, stress, and a sense of failure. The phenomenon has become so widespread that it has been declared to be a ‘crisis in health care’ by the Harvard Global Health Institute and various Massachusetts health institutes. Both the Medscape and Harvard reports were authored prior to COVID-19, so you can imagine how doctors are holding up almost one year into the pandemic.

The factor most reported by doctors relating to burnout was the ever-increasing burden of documentation, which not only detracts from doctor-patient time but results in long hours at the office behind a computer compounded by anxiety over billing issues.

But there is a glimmer of hope as technology is coming to the rescue.

“High Quality Clinical Documentation That Writes Itself”

Nuance Communications, Inc. (NUAN) is a leader in conversational artificial intelligence (AI) within the healthcare industry, and it may have a solution, or at least a partial solution, for the prime factor that leads to burnout, clinical documentation. The recently launched product is called Nuance Dragon Ambient Experience (DAX), an application that records the doctor/patient session and by use of AI, generates most of the clinical documentation. With DAX, physicians can now focus on patient interaction while minimizing the time involved with documenting the patient/doctor session and related billing. The use of DAX translates to higher patient throughput as well as less work hours and fewer billing-related errors that may cost the health facility money.

DAX can be used as a standalone product or as a mobile application and recently, Nuance announced that DAX is being integrated with Microsoft Teams as a telehealth application. Physicians will be able to conduct virtual visits with patients from within the Microsoft Teams environment while DAX “securely captures the details of the virtual visit in context” by use of AI.

Business Transformation

Nuance’s financial performance has been declining for several years, with -5% CAGR revenue growth for the last five years. Revenue was down 9% year-over-year for the most recent quarter (Q4 2020), partially due to economic conditions resulting from the pandemic, but also as a result of the company’s ongoing business transformation which involves divestiture of non-core businesses and a shift to the cloud for the remainder of its applications. The future of Nuance will be a cloud-centric subscription-based recurring revenue business model.

As part of this transformation, Nuance recently announced that the company is selling its medical transcription and EHR Services businesses. This follows the 2019 divestiture of its Mobile Operator Services Division, automotive and imaging businesses.

The transformation has not been limited to the elimination of non-core products. Nuance has also been migrating legacy products such as Dragon Medical One (DMO), PowerScribe One, and CDE One to the cloud. What’s more, it has also launched new applications such as cloud-based Computer-Assisted Physician Documentation (CAPD) solutions, and of course, the previously mentioned DAX.

Other Markets

In addition to the healthcare segment, Nuance also operates Enterprise. The company generates more than 60% of its revenue from healthcare applications, while most of the remaining revenue comes from its Enterprise segment, which provides conversational AI solutions to address automated contact center applications for voice, mobile, web and messaging channels. On top of this, NUAN is actively pursuing enterprise business in the area of biometrics, authentication, and related security applications.

Looking Forward to Fiscal Year 2021 (FY 2021)

While FY 2020 was a year of shrinking revenue, it may have been the turning point in what could very well be a promising future. Nuance has 1,600 R&D staff and a large customer base. Healthcare cloud-based annual recurring revenue (ARR) was up 29% for FY 2020.

Additionally, the transition toward a cloud-based Software-as-a-Service (SaaS) business model will give the company more avenues for revenue growth, including cross-selling, upselling, and scaling up with customer success. Management has guided for 3% to 7% revenue growth for FY 2021.

Although the future for Nuance looks promising, there are two issues that investors should be aware of. The first issue is that there will be a revenue shortfall in 2021 pertaining to the loss of a term license $40 million government contract in the company’s coding business, according to commentary from management. The loss of revenue is accounted for in the FY 2021, but it does raise concern regarding other government contracts that the company may have. Government priorities do not necessarily align with Nuance’s priorities, especially in this difficult economic environment.

The second issue relates to the ongoing pandemic and the emergence of new and more contagious strains of COVID-19 and the slow rollout of vaccines. The ongoing health crisis had a negative impact on Nuance’s FY 2020 financial performance and the virus’ resurgence could end up having more of an effect than was anticipated in the company guidance.

Nuance Communications announces Q1 2021 earnings on February 8, 2021 after market close.

Wall Street’s Stance

Looking at the consensus breakdown, 7 Buys and 1 Hold have been assigned in the last three months. Therefore, NUAN earns a Strong Buy consensus rating. That said, based on the average analyst price target of $49.57, shares could decline 1.6% in the next year. (See Nuance Communications stock analysis on TipRanks)

Disclosure: On the date of publication, Steve Auger did not have any positions in the securities mentioned in this article.

Disclaimer: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities.