Why Nuance Communications Needs Earnings Growth Now

Image: Nuance.

Investors in Nuance Communications (NUAN +0.00%) once believed that they were at the epicenter of the mobile revolution, with the company's voice-recognition software helping to drive some of the most popular mobile devices on the market. Yet Nuance shares have lost about half their value since their highs three years ago, and coming into Thursday afternoon's fiscal second-quarter earnings report, shareholders want to see signs that the company could finally start to move back toward a more sustainable growth trajectory. Let's look more closely at Nuance Communications and what its quarterly results will tell us about the company's long-term prospects.

Stats on Nuance Communications

Source: Yahoo! Finance.

Can Nuance Communications earnings recover?
In recent months, investors have reduced their projections on Nuance earnings, reducing fiscal second-quarter estimates by $0.03 per share and making reductions of 1% to 2% on full-year fiscal 2015 and 2016 earnings outlooks. Despite those concerns, Nuance stock has climbed recently, with gains of 11% since late January.

Nuance's fiscal first-quarter results indicated how difficult a time the company has had in making progress. Revenue dropped slightly, with adjusted sales gaining less than 1%. Earnings managed to grow by a penny per share to $0.25, but Nuance's ongoing efforts to rely more on recurring revenue sources has made it difficult for the company to make big strides toward recovering its faster growth from the past.

The biggest problem that Nuance has faced is that mobile devices haven't become the vehicle for virtual personal assistants that many believed they would, and that has reduced demand for the voice-recognition services that Nuance provides. Revenue from the company's mobile and consumer segment has actually fallen over the past couple of years, and it doesn't appear likely that the mobile revolution will be what produces the next wave of Nuance's growth.

Instead, the health care business has been a saving grace for Nuance, with steady rises in sales in the segment. With the desperate need for transcription services, health care providers represent a big potential market for Nuance, especially as it aims to be the conduit for intelligible information recording and storage for harried professionals looking to leave notes as efficiently as possible.

Image: Nuance Communications.

Nuance has pursued multiple initiatives during the quarter. The coming PowerMic Mobile app will allow users to use iOS or Android devices as dictation devices, allowing physicians or other professionals to record speech whenever it's convenient for them. A partnership with Samsung targets the Gear S smartwatch by allowing direct use of Nuance's Dragon Medical 360 platform to transcribe notes. Other offerings allow Nuance users to automate lists of patient problems and allergies for inclusion within electronic medical records, making it easier for medical professionals to gain access to such records and reducing the risk of life-threatening mistakes.

At the same time, Korean mobile provider SK Telecom chose Nuance's voice biometrics offerings to help its users authenticate their identities to access secure information. Increasingly, voice biometrics have become more popular, and Nuance has the inside track toward growing that part of its business.

In the next Nuance Communications earnings report, it'll be important for the company to keep at least some of its major segments growing. Even if the mobile segment hasn't lived up to expectations and isn't likely to make much progress in that direction in the near future, Nuance has other opportunities that can help select niche groups get full value from its voice-related products. If Nuance can prove that it can turn those applications into profits, then the stock might finally produce a more lasting recovery from its recent low levels. That's the biggest reason why Nuance really needs to get its profits growing as soon as possible.