Nuance Earnings Could Leave Investors Speechless

Nuance Communications (NUAN) will release its quarterly report on Tuesday, and the innovative creator of voice-recognition software has inspired many investors seeking to cash in on the smartphone revolution. Yet with that revolution having hit a brick wall recently, Nuance earnings look poised to drop in the near future, and the company is struggling to figure out how to get its business healthier.

Nuance's partnership with Apple (AAPL -0.33%) has been a major part of its overall growth story, and so it's not unreasonable to see that as Apple hits some speed bumps in its own growth, Nuance is suffering. But the company has earned design victories in other arenas, seeking to broaden its offerings to diversify its revenue stream and leave itself less vulnerable to Apple's business. Let's take an early look at what's been happening with Nuance Communications over the past quarter and what we're likely to see in its report.

Stats on Nuance Communications

Source: Yahoo! Finance.

Can Nuance earnings speak up this quarter?
Analysts have reined in their views on Nuance earnings somewhat in recent months, pulling back on their June-quarter estimates by $0.01 per share and their full-year fiscal 2013 and 2014 consensus figures by double that amount. The shares have gone nowhere, with flat performance since the end of April following a huge decline after the company's first-quarter earnings report.

That report set the tone for Nuance's current funk, as the stock plunged 19% after the company missed earnings and revenue estimates for the quarter rather badly. Despite 16% growth in adjusted revenue and 61% growth in smartphone shipments from Apple rival Samsung, Nuance guided June-quarter earnings expectations far below analyst predictions, seeing substantial margin contraction of more than four percentage points for the remainder of the year. With Nuance increasingly getting usage-based payments from its customers that reflect a lack of popularity for its products, the company could see continued pressure if smartphone users don't actually use voice-recognition services more often.

But Nuance believes that other areas beyond smartphones have substantial promise. In June, it announced that Toyota will use Nuance's Dragon Drive to power its G-Book navigation app. Meanwhile, Barclays hired Nuance to provide its FreeSpeech voice biometrics product to identify clients, avoiding the risk of identity theft from having to use security questions. Health care is already a key area for Nuance, with its new Dragon Medical Practice Edition helping to provide valuable electronic health records support for the sophisticated jargon that medical professionals use.

The interesting question for investors is whether the stake that billionaire investor Carl Icahn has in Nuance will result in meaningful change at the company. So far, Nuance hasn't made any dramatic shifts in its business strategy, but with shares near two-year lows, Icahn likely won't remain patient for long.

In the Nuance earnings report, watch to see whether it has succeeded in diversifying its business beyond the Apple empire. In the long run, voice recognition might become omnipresent, but at the moment, growing pains aren't making Nuance shareholders very optimistic about near-term prospects.

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