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As with any company that offers software services, the ongoing shift to the cloud and on-demand services has been disruptive to revenues and profits in the short-term. The issue previously impacted Adobe Systems (NASDAQ:ADBE) and Intuit (NASDAQ:INTU) and now Nuance Communications, Inc. (NASDAQ:NUAN) has been greatly impacted by the shift.

The company is a leading provider of voice and language solutions for businesses and consumers around the world. Its technologies, applications, and services make the user experience more compelling by transforming the way people interact with devices and systems.

Nuance trades around 52-week and multi-year lows even as stocks around the world have soared to all-time highs. The company recently rushed out a weak Q213 report that disappointed investors by slashing full year guidance. The main culprit was a swift shift to on-demand services away from perpetual licenses. This move causes revenue to be recorded over an extended period thereby greatly reducing current revenue. The company though did a horrendous job of quantifying the shift in the earnings report and conference call.

Q213 Earnings Highlights

The company provided the following highlights for Q213:

  • Non-GAAP revenue of $484.0 million, which includes $33.0 million in revenue lost to accounting treatment in conjunction with acquisitions. Second quarter fiscal 2013 non-GAAP revenue grew 15.9% over non-GAAP revenue of $417.7 million in the second quarter of fiscal 2012.
  • Non-GAAP net income of $110.4 million, or $0.34 per diluted share, compared to non-GAAP net income of $138.8 million, or $0.43 per diluted share, in the second quarter of fiscal 2012.
  • Cash flow from operations of $93.1 million in the second quarter of fiscal 2013, down from $100.5 million in the second quarter of fiscal 2012.

The numbers highlight a company struggling to meet estimates rather than a broken company or stock. In fact the shift to on-demand services has led to a dramatic increase in the bookings to $2.1 billion, up 52% from $1.4 billion in the previous year. The company though didn't quantify how much of the revenue shifted to later periods that would've in the past been recorded in the current quarters.

This strong bookings growth will benefit revenue in the second half of this year and fiscal 2014. So while the shift from near-term license revenue to royalty and on-demand pricing models impacts the guidance for the year it doesn't impact the long-term potential of the company.

Due to these factors Nuance dropped earnings from analyst estimates of $1.83 to a range of $1.33 to $1.45. The amount is also a substantial drop from earnings of $1.73 last year.

Carl Icahn Loads Up

The corporate raider used the 18% selloff following the weak guidance to add to his position. Carl Icahn increased his stake in Nuance to 10.72% from 9.27%. Per the SEC filing, the legendary activist bought an additional 4.23 million shares bringing the total to nearly 34 million shares worth around $650M.

The stock traded between $18.75 and $19.75 on the day in question. With the stock closing at $19.04 and spending a considerable amount of time holding that level the likelihood exists that his firms were loading any time the stock traded below $19.

In addition to the Icahn purchases, the company announced a $500 million stock repurchase plan. The combination of the two plans provide over a $1 billion in support of the stock at the current levels around $19.

Launch Of Voice Ads/Biometrics

As mentioned in the last article, Nuance recently announced the launch of the Voice Ad product for mobile phones. This product promises to use the voice-activated technology of Nuance to create incredible interactive mobile ads. The company hopes that speaking to an ad will create a lasting impression for the brand as opposed to the mostly ignored display ads.

Now Nuance is rolling out biometrics with Barclays for customer identification. Barclays is utilizing the FreeSpeech voice biometrics solution to securely and automatically confirm the identity of customers. It becomes the first financial services firm to deploy passive voice biometrics as a primary means to authenticate customers in their call center.

These products combined with the better than expected growth of enterprise virtual assistant Nina Mobile, the company has several interesting products to drive growth.

Google Fears Overblown

All of the recent weakness has helped drum up fears that the weakness might be more related to competitive pressures instead of a forced shift in the business model. Google (NASDAQ:GOOG) recently hired tech evangelist Ray Kurzweil to focus on enabling computers to truly understand and even speak in natural language.

The company recently launched an app on the iPhone and iPad to bring Google Now voice search in direct competition with Siri developed by Nuance for Apple (NASDAQ:AAPL). Reading a recent interview from Forbes with Ray and its clear that the focus is on improving search and developing that interaction with the following statement:

What I'll be doing here is developing hierarchical methods specifically aimed at understanding natural language, extracting semantic meaning…actually developing a way to represent and model the semantic content of documents to do a better job of search and answering questions.

Not that anybody expects Google to stop at only search if the technology is robust enough for virtual assistants in the enterprise sector or even transcribing medical records. For now though, the company doesn't appear to have any plans other than to develop the technology and enable it for better answers to search queries.

Stock Performance

The stock performance over the last 2 years has been utterly dismal. The stock peaked at around $31 in early February last year and eventually traded down to $18. The stock trades only slightly above the lows around $16 back in August 2011. That period was wrought with fears of another financial collapse and has led to a massive market rally since those days. Nuance hasn't participated.

The below chart highlights the lack of returns from Nuance along with the big gains by Google during that time period:

NUAN Chart

NUAN data by YCharts

Conclusion

With the last article, the suggestion was to wait for the stock to drop back to $20 before investing. Anybody waiting long enough can now buy the stock right around where Icahn loaded up twice. Nuance has several strong products just beginning to generate revenues that could turn into big products making the stock an attractive value.

Unfortunately, the company wasn't clear about the impact of the transition to on-demand services. Until the impact is more clearly understood, the stock is likely to languish at these levels. The longer the stock hangs at these levels the greater the potential exists that another company such as Microsoft (NASDAQ:MSFT) or Yahoo (NASDAQ:YHOO) purchases the firm. The addition of the voice recognition expert might provide unlimited potential in the hands of a cash rich firm wanting to compete with Google in mobile search or the enterprise market.

Source: Nuance Hit By Shift To 'On Demand' Services

Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.