Nuance Keeps Moving Forward, but Is the Future Clouding Up?

One dream of technology visionaries has been to have computers recognize voices, and Nuance Communications (NASDAQ: NUAN) has made substantial progress with its voice-and-language solutions services. The company has been making a transition toward emphasizing recurring revenue sources, but coming into Thursday's fiscal fourth-quarter financial report, Nuance investors weren't sure whether the company would be able to avoid small declines in earnings and revenue.

Nuance's results were a little better than some had expected, but the question that its outlook raised was whether future growth will be as strong as investors want it to be. Let's look more closely at Nuance Communications and how its prospects look going forward.

Nuance is the company behind Dragon voice recognition products. Image source: Nuance Communications.

Nuance keeps pushing ahead

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Nuance's fiscal fourth-quarter results didn't produce much excitement, but they weren't as bad as some had feared. Adjusted revenue was down 0.2%, to $512.4 million, and that was far better than the 2% drop in the top line that most investors were expecting to see.

Similarly, adjusted net income fell by a more dramatic 9%, to $118.6 million, but a big reduction in share count held adjusted earnings steady at $0.41 per share. That was $0.02 per share better than the consensus forecast among those following the stock.

Looking more closely at Nuance's segments, healthcare's results were largely negative despite record net new bookings, as a 7% drop in adjusted revenue and falling margin figures hurt the segment's bottom line. The mobile division also suffered substantial sales declines, falling 8% because of falling handset-related revenue, but segment margin stayed flat from year-ago levels.

The enterprise and imaging segments were much stronger. Enterprise saw 23% sales growth and an 8-percentage-point boost in margin, to 35%, while revenue gains of 7% for imaging helped lead to similar profit improvement thanks to a 6-percentage-point margin increase.

Nuance's progress in making a transition toward recurring revenue continued. All told, revenue from recurring sources jumped to 70%, up 4 percentage points from the previous-year's period. Perpetual licensing revenue continued to decline, falling by 15% from year-ago levels.

CFO Dan Tempesta maintained an upbeat outlook about Nuance's prospects. "Nuance delivered strong performance for the fourth quarter and fiscal year across key financial metrics," Tempesta said, "including net new bookings, revenue, recurring revenue, earnings, and deferred revenue." The CFO also noted that the work that the company has done will be important in driving organic growth going forward.

Can Nuance climb higher?

Specifically, Nuance believes that its long-term strategy will pay off over time. As Tempesta put it, "We remained focused on our cost discipline and transitioning the business toward recurring revenue models while strengthening our competitive position in important markets through our investments in innovation and additional offerings."

The question, though, is whether Nuance investors will be satisfied with the company's outlook for fiscal 2017. The voice-and-language specialist said that it expects net new bookings to add to its record pace in 2016, climbing by 2%, to 6%. However, headwinds from the company's shift toward a recurring revenue model will hold back anticipated stronger performance in its growth business, limiting organic growth in revenue to just 1%.

Adjusted revenue guidance for $2.02 billion to $2.07 billion was relatively similar to the consensus forecast of $2.04 billion. Cost initiatives could produce expense savings and bottom-line improvement, but guidance for adjusted earnings of $1.53 to $1.63 per share predicts poorer performance than investors were hoping to see.

Still, looking out further, Nuance expects better results. In fiscal 2018, Nuance is looking for organic revenue gains of 2% to 4%, and continued growth in net income and earnings per share should build on its success in producing and building recurring revenue sources.

Nuance investors didn't react very much to the news, sending the stock up just 1% in after-hours trading following the announcement. The long-term view appears to be winning favor, and investors seem patient enough to wait and see whether Nuance can achieve the eventual results from its strategic shift that it's hoping to see.

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