After another weak quarter, Nuance Communications (NASDAQ: NUAN ) continues to hammer away on the current theme that the shift to on-demand and subscription services is hurting short-term revenues while increasing development costs. The shift is occurring due to customers moving toward cloud services and per use charges for health care and mobile transactions instead of one-time perpetual licenses. This move shifts revenue from up-front payments toward receiving the revenue over periods of two to three years.
The maker of voice-recognition software most fondly known for Siri used in Apple products continues to underwhelm investors expecting better results and a quicker shift.The stock continues to plow toward new lows even with an exciting sector of developments for voice-recognition and natural-language software in the medical field and enterprise virtual assistants. The disruptive shift toward on-demand and subscription services isn't new, having already hit software stocks such as Adobe Systems and Intuit (NASDAQ: INTU ) .
Carl Icahn has made significant investments in the stock, and investors need to remember that some of Icahn's investments, such as Navistar (NYSE: NAV ) , took years to generate positive returns. On a positive note, Nuance did provide one little nugget in the mostly disappointing quarterly release, and it could change the dynamic of the results going forward.
The ongoing shift
The shift to on-demand services has been an ongoing issue for the last couple of years. The big issue is that Nuance has now lost credibility because the process has taken longer than forecast, and it still doesn't appear to be near an end. With every reported quarterly release, the company has continued to reduce the earnings forecasts going forward.
The main issue is that the more that bookings increase and revenue shifts to on-demand and subscriptions, the company is stuck with up-front costs that aren't yet matched with revenue. In the latest report, the on-demand revenue only reached 32% of total revenue, while license and product revenue only dropped to 42%. The shift over the last two fiscal years has only been a relatively small 5 percentage points.
Intuit went through a similar transition, but the stock has now soared over the last two years. The provider of business and financial management solutions for small business customers turned around when earnings hit an inflection point of turning back north again.
Important bookings metric
With the shift to subscription services, Nuance should start seeing a a focus on bookings versus revenues. It's very standard for software companies including all of the recent hot cloud software stocks to focus on bookings. In this manner, Nuance provided investors with guidance for bookings to increase by 15% in fiscal 2014. A very solid growth rate if achieved, but this amount only relates to the on-demand services division and again provides visibility to the division that only accounts for 32% of revenue. Bookings did increase 9% in fiscal 2013 so at least limited progress is being made.
Intuit is highlighting the path to stock gains for Nuance with roughly two-thirds of customers now on cloud and connected solutions. In fact, the TurboTax division has already reached a level of 75% of customers utilizing online and cloud-based solutions. The QuickBooks division continues to see fast growth with the online version generating revenue growth of 29%.
Without any detail studies available, one could probably assume that investors that have bought Carl Icahn's investments below his entry levels have had outstanding outcomes. Too many investors think that all of his picks go straight up due to his recent success in Apple and Netflix, but a previous investment in Navistar had periods of frustrations for his investors that followed him into the stock expecting instant success.
The recent stock declines in Nuance possibly present one of the best opportunities to invest alongside him at an attractive price. The trucking firm of Navistar had a similar path to where the stock initially jumped on his entry back in October 2011, but it eventually plunged after engine problems left it in a bad position. Icahn bought a nearly 10% stake in the $30 range, but a year later the stock had crashed below $20. Alas, investors had months to buy alongside Icahn at a lower entry point that could've provided roughly a double in the last year with the stock sitting near $40.
The path of Intuit toward subscription services and the ultimate success on Navistar should provide hope for existing Nuance investors. Ultimately, the company has a solid business, but investors need to be careful with the stock in the short-term. The existing management isn't making the transition to subscription services quick enough and fiscal 2014 could be another rough year in the transition. Icahn may make a splash at any time, but it's going to be difficult for the stock to make prolonged moves until the transition reaches a larger scale.
Nuance could be a major winner for the patient investor willing to research the stock and wait for the opportune time to invest. The Navistar and Intuit examples prove out that the situation will eventually turn.
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