Nuance Communications Talks Up Growth, but Will Investors Hear?

By Dan

What's next for Nuance? Image source: Nuance Communications.

In the acting world, many performers are wary to take on certain roles for fear that they'll be typecast for the rest of their careers. In some ways, Nuance Communications faces the same problem, as its voice-recognition software has made it irrevocably linked in most people's minds with Apple and its Siri service.

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Yet what most people don't realize is that Nuance gets most of its revenue from outside the mobile-and-consumer segment. With the release of its fiscal first-quarter results Thursday afternoon, Nuance gave more evidence of its transition toward other lines of business.

Even with solid results, though, investors aren't certain what the future will bring from Nuance, and that has the stock remaining under pressure. Let's look at how Nuance did during the past quarter, and what its strategic vision looks like for the remainder of the year and beyond.

Are investors listening to Nuance's story?Nuance's overall results for the quarter show the holding pattern that the company has been locked in for a while. Adjusted revenue eased downward 0.2%, to $489 million. Even taking out adjustments related to acquisitions, GAAP sales climbed less than 1%.

Adjusted earnings fared a little better, with the quarter's $0.25 per share topping last year's results by $0.01. Both figures outpaced what most investors had expected to see from Nuance, with projections calling for modest declines in both revenue and earnings.

Once again, Nuance's segment results reflect differing performance across the company's focus areas. Healthcare, which includes medical transcription and similar services, posted modest gains of around 2% in sales, and Nuance's imaging business grew at a faster 3% pace. But both the enterprise segment and the mobile-and-consumer business saw sales decline, with a nearly 5% drop in mobile demonstrating the continuing challenge that Nuance has faced trying to bolster that portion of its business.

Automotive applications for voice recognition are increasingly important. Image: Nuance Communications.

Still, Nuance keeps emphasizing the importance of recurring revenue, and the company made further strides toward ensuring that its subscription-based model will provide long-term success. During the quarter, total recurring revenue jumped almost 4% from year-ago levels, and now, Nuance gets about 66% of its total revenue from recurring sources. Perpetual licensing and product sales fell 9% from the previous year's quarter, further showing how much Nuance is counting on its new strategy to provide future growth and reliable results.

Nuance's management concurred with that assessment. As CFO Tom Beaudoin said, "Our recurring revenues continue to benefit the business as we sustained growth in deferred revenue and operating cash flow." With greater stability in revenue, Nuance hopes to build a base on which to build further growth opportunities down the line.

What's ahead for Nuance?There's no doubt that Nuance has the potential to remain an important player in its niche specialty. Looking at the company's major customers during the quarter, you can see just how well-renowned Nuance is, with a wide range of nationally recognized hospitals and healthcare systems, mobile-device makers, and industrial behemoths among its customer base, along with key government agencies at the global, national, and local levels.

Mobile is still a substantial part of Nuance's business. Image: Nuance Communications.

Yet so far, Nuance isn't saying what investors want to hear. In its guidance for the remainder of the year, Nuance said it expects revenue between $1.955 billion and $2.005 billion, well short of the $2.05 billion that investors expected prior to the report. Earnings guidance of $1.08 to $1.18 per share is in line with consensus projections, but Nuance's fiscal second-quarter revenue and earnings projections didn't meet up to expectations, either.

In response, investors reacted negatively immediately following the release. In the first 45 minutes of after-hours trading, Nuance shares dropped another 2.5%, further hurting shares that are already trading below late-2009 levels.

In order to rebuild investor confidence, Nuance needs to win some high-profile victories with its revolutionary products. With its focus on Dragon Medical, as well as solutions in the Automotove, Diagnostics, and Enterprise Multi-Channel areas, Nuance has the ability to regain its past success -- but to do so, it will have to convince customers that it is the right source for the solutions they need.

The article Nuance Communications Talks Up Growth, but Will Investors Hear? originally appeared on

Dan Caplinger owns shares of Apple. The Motley Fool recommends Apple and Nuance Communications. The Motley Fool owns shares of Apple and Nuance Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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