Analyst on Microsoft's healthcare push: 'This is one of many steps'

Jefferies Analyst Brent Thill joins Yahoo Finance Live to discuss Microsoft's $16 billion deal to buy Nuance Communications.

Video transcript

- I want to start off with Microsoft's big acquisition here because we don't talk a lot about them, though they have been a little bit more active in seeking out opportunities, the latest Nuance Communications. A price there-- Akiko, this one going to be about 23% of where we saw shares of Nuance trading on Friday, $56 a share. When you rope in debt, you get north of $19 billion.

Let's break down what it means for Microsoft here moving forward. To kick off the show, our first guest, Brent Thill. He's a Jefferies analyst. He joins us right now. Brent, we talk about Microsoft being more active. But what does this mean for them, and why would they seek out a speech software leader like Nuance here? What do they seek to gain from it?

BRENT THILL: Thanks for having me. I think as it relates to health care, this is one of the worst industries in terms of automation. Anyone that's seen a doctor realizes how difficult this process is. And from the doctor actually figuring out how they best can help you through the process flow of the entire information flow is really broken. I think Nuance and Microsoft aim to close the gap on that as it relates to health care, number one. Obviously, there's an enterprise business too. Many call centers you call into are automated. I don't think that's going away. So there's an enterprise angle on this as well.

But I think that the primary focus of this is health care. And again, I think this is one of many steps that Microsoft needs to take to solidify their business in the health care market. But big market, and obviously, Amazon is making a big push into this industry as well. And I think everyone's going after the golden ticket. Health care is just really a really bad process automation. There's a lot of inefficiency and waste that happens.

Clearly, a very expensive deal, the second largest deal. They haven't done a deal this expensive for five years, so looking at a big price tag. But obviously, a big, addressable TAM that they feel they can go after.

AKIKO FUJITA: Yeah. Brent, I wonder if we can talk about that enterprise side there. At first glance, obviously, the health care side, we're certainly looking at that. But there seems to be a big opportunity, especially given the big footprint of Microsoft already has in enterprise. How supportive do you think that Nuance can be in growing that side and servicing the existing clients?

BRENT THILL: Yeah. I think many of us aren't really calling call centers as much anymore. We're going to self-serve. We're going online. So the enterprise business will be important, but I think health care is priority one. When you look at the enterprise business, again, I think many of us get to call centers. We just hit 0 and want to get to a live operator to get help. So my view is that Nuance has been in the enterprise for a long time. It's still an important legacy installed base, but I think health care is going to be the primary focus or where they make a push here.

DAN HOWLEY: Brent, this is Dan Howley. I want to ask what this means, I guess, for the health care space overall. Is the health care space really the next major battlefield for these tech companies? Obviously, we have Microsoft and Amazon and Google doing their back and forth in the cloud. But does this push into health care from the likes of Microsoft and Amazon on its own side speak to that growing war between them all?

BRENT THILL: Yeah, there's no question. We've been predicting for years that Amazon would make a bigger move into health care. And obviously, Amazon is pushing their own health care initiative beyond the inside of the company to now providing telehealth to all of us out in the field. You see what they did with the PillPack acquisition around the delivery of these drugs to your home. So I think both are taking a different angle on this, but I think there is a collision that's going to happen. And it's no surprise that this deal happened given how big the health care space is, given how terrible the process is. Again, just look at your daily life, and what's the number one thing you cringe doing? It's the entire process of what's happening.

I've got a stack of bills behind me on the health care side from my kids and refunds and checks you've got to deposit. And the process is terrible, right? So if you look at what Amazon and what Microsoft and the rest of these companies can do to help put this into more digital form, into a more automated form-- as Microsoft highlighted this morning, the AI component of this, I kind of chuckle because I still think we're still a long ways away from the AI being as meaningful as I think Microsoft would want you to believe. But I think this is the dream. And this is definitely, no question-- Google's been pushing. You're going to see all big three mega clouds go after this space in a big way.

- Brent, lastly, though, it sounded like you were talking about maybe the valuation being a bit high here for Nuance. Obviously, no doubt, you're not going to hear anyone disagree when we talk about frustrations in the health care space. But when it comes to the price they paid, what do you make of that, and maybe how quickly they're going to want to see this side of the business start to grow?

BRENT THILL: Yeah. Again, it's the most expensive deal they've done in five years. Obviously, software valuations have gone sky high in the last three or four years. You've seen valuations last year in software across the board up 50% on multiples. So no one's going to say software is cheap in the industry. So that's an industry-wide phenomenon. But yeah, this was a very large transaction, and it was a very expensive deal. It equates to about 14 times next 12-month revenue. That is a very expensive multiple for a company that, quite frankly, has been going through a transition. And Nuance is transitioning from a perpetual model, on-prem, to a cloud model. And so again, big multiple. But they had the keys to the voice-enabled systems in health care, and they've done a really nice job in that segment of the business.

So multiples are what they are right now. They're really high across the industry. So any deal you're going to do in software right now, you're going to pay a big multiple. That's just the reality of our industry at this time. But again, I look at it an say given the vertically aligned focus for health care, I think they get a hall pass for investors given how big this market is and given the opportunity. And if Amazon wasn't going after it, then people would scratch their head. But all three of the mega clouds are going after health care in a big way.