Image: Nuance Communications.

Voice-recognition specialist Nuance Communications (NASDAQ:NUAN) has gone through a huge amount of turmoil in recent years, but recently, investors have started to be slightly more optimistic about its prospects following its transformation to a recurring-revenue business model. Coming into Thursday afternoon's fiscal third-quarter financial report, Nuance investors didn't think that the company would post huge amounts of growth, but they nevertheless looked forward to seeing signs of continuing positive momentum.

Nuance's results actually looked fairly good on their face, but investors nevertheless reacted badly in the immediate aftermath of the company's release of its report. Let's look more closely at Nuance to see what's happening with the niche player in voice recognition.

Nuance makes things sound a bit better
Nuance's fiscal third-quarter results outpaced what most investors were looking to see from the company. Nuance posted adjusted revenue of $488.7 million, up less than 1% from the year-ago quarter, but still avoiding the 1% sales decline in the consensus forecast among those following the stock. The voice-recognition company reported a GAAP loss for the quarter, but after making changes to reflect extraordinary items, adjusted net income of $101.1 million rose 15% from the year-ago quarter, and produced earnings of $0.32 per share, $0.03 better than investors had expected.

A closer look at Nuance reveals the typical different dynamics affecting its various business segments, but all four major businesses posted year-over-year revenue declines. The Imaging business suffered the greatest sales drop, at 8%, but the larger Mobile and Consumer arena also suffered substantial declines of 5% compared to the prior year's fiscal third quarter. Healthcare continued to play a vital leadership role in the company, but it also saw a slight decline of 1% during the past year. Enterprise segment revenue was mostly flat, falling less than 1%.

In terms of profits, though, Nuance had a much different picture. Adjusted profits for the Healthcare segment fell almost 4%, to $81.8 million, but all three other segments saw solid year-over-year gains. The biggest positive contribution came from Mobile and Consumer, where adjusted segment income rose $7.3 million, to $27 million. Enterprise and Imaging saw even greater gains on a percentage basis.

Nuance has continued to see more of its revenue come from recurring sources, although the rise has decelerated recently. For the most recent quarter, Nuance got 68% of its sales from recurring sources, and perpetual-license revenue has dropped to just 23% of adjusted revenue. On-demand revenue, in particular, has benefited from generally favorable trends, although some customer moves toward full automation have eaten into sources of on-demand revenue.

CFO Dan Tempesta expressed his views on the results, noting that, "Nuance delivered revenue and EPS that exceeded our non-GAAP guidance ranges, and net new bookings that have us on track to our full fiscal year guidance." Tempesta also praised Nuance's efforts to cut costs, pointing to actions under its expense-reduction program that have thus far produced $50 million in annualized expense reductions.

What can Nuance investors expect in the future?
Nuance's guidance for the near future seemed generally favorable. The company expects full-year fiscal 2015 net new bookings to grow between 1% and 4%, with Healthcare, Enterprise, and automobile-related business producing much of the gain. Foreign-exchange headwinds will keep weighing on Nuance's results, costing it two to three percentage points of bookings growth, but Nuance expects positive trends in its Dragon Medical, Diagnostics, mobile operator services, and automotive businesses to remain strong.

In particular, Nuance said that fiscal 2015 adjusted revenue would finish between $1.963 billion and $1.979 billion, which is in line with the $1.97 billion consensus forecast among investors. Fiscal fourth-quarter sales of $497 million to $513 million are also consistent with the $509 million current estimate. Similarly, adjusted earnings per share of $0.33 to $0.37 for the fiscal fourth quarter and $1.20 to $1.24 for the full year shouldn't have come as any big surprise to investors, given the most recent consensus figures among those following Nuance.

Nuance investors seemed confused by the results, which, admittedly, were difficult to follow at times due to the presence of GAAP and non-GAAP figures. After falling more than 6% in the first hour of after-market trading following the announcement, Nuance shares started to recover following the conference call, declining less than 2% two hours into the session.

What's clear, though, is that even if Nuance has turned the corner, it still has a long way to go before it can give long-term shareholders the full recovery they've been waiting for.