Nuan Auto
Voice recognition has huge potential in hands-off auto applications. Source: Nuance.

For years, voice-recognition specialist Nuance Communications (NASDAQ:NUAN) has struggled to live up to its full potential, and investors have had to remain patient as its stock has slowly slid downward from its early 2012 highs. Yet last quarter, Nuance showed some new signs of life, and coming into Thursday afternoon's fiscal third-quarter earnings report, Nuance shareholders want confirmation that last quarter's good news wasn't just a one-hit wonder that provided temporary respite to a longer-term problem. Let's take a closer look at what to expect from Nuance Communications this quarter and whether it can continue to make progress toward a healthier long-run growth trajectory.

Stats on Nuance Communications

Analyst EPS Estimate

$0.29

Change From Year-Ago EPS

7.4%

Revenue Estimate

$480.36 million

Change From Year-Ago Revenue

(1.3%)

Earnings Beats in Past 4 Quarters

3

Source: Yahoo! Finance.

Will Nuance Communications earnings keep growing?
In recent months, investors have gotten more optimistic about Nuance earnings, boosting their fiscal third-quarter estimates by a penny per share and making more dramatic boosts of 6% to 10% to their outlooks for the full 2015 and 2016 fiscal years. The stock has also responded favorably, with gains of 18% since late April.

Nearly all of the recent excitement about Nuance Communications came after the company released its fiscal second-quarter results back in May. The software specialist's revenue still fell slightly from year-ago levels, but a double-digit percentage rise in adjusted net income showed that Nuance's efforts to boost its profitability were working. In particular, strength from Nuance's mobile and consumer segment pointed to its success in taking advantage of favorable conditions in that market, and acquisitions in the imaging area also helped contribute to higher profits. Nuance didn't execute perfectly, as weakness in healthcare held the company back somewhat, but for investors expecting relatively little from the company, Nuance clearly did better than what some had feared.

One thing that should make it easier for investors to evaluate Nuance going forward is that it has largely completed its transition away from license-based sales toward a subscription model. Recurring revenue made up about two-thirds of Nuance's total sales last quarter, and now that it has already absorbed most of the short-term hit to the top line, Nuance should start being able to see sales gains if it can attract more customers to its products.

Still, not everyone is convinced that Nuance has truly turned the corner. Some analysts speculate that it might be worth more if its various business units were split into separate companies, with the company's healthcare business drawing particular attention given the rapid pace of innovation in the field more broadly. With activist investor Carl Icahn maintaining a substantial stake in Nuance, the pressure to consider moves to split off or divest itself of its healthcare or imaging businesses in order to focus on the mobile and enterprise areas could become stronger, especially if the recent improvement in the share price begins to stall out in the near future.

Moreover, the prospect of heightened competition could pose a long-term threat to Nuance. Major technology companies are already looking at ways to integrate voice-recognition capabilities into specialized offerings for high-growth industries like healthcare. That could pose an opportunity for Nuance if one of those potential competitors simply wants to buy its healthcare unit, but if they build up their own capability in-house, then it could erode the value of Nuance's business quickly.

Nuance isn't giving up without a fight. Through a collaboration with a key healthcare information services provider, it has offered its Dragon Medical 360 software through a specialized marketplace to clinicians in order help them transcribe their medical records into an acceptable electronic format more efficiently. Especially in medical environments with high patient turnover, being able to collect and store information effectively can help professionals optimize their workflow and make their work lives easier.

In Nuance's earnings report, be sure to look for comments about long-term strategy among the company's major divisions. By looking at how the voice-recognition specialist is positioning itself for the future, you might be able to see signs of a coming divestiture or split-up. No matter which direction it chooses, Nuance simply has to find ways to generate sustainable growth in all the businesses it pursues, and if it does, it should sustain its positive momentum from earlier in 2015.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends and owns shares of 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.