Will Apple and Icahn Save Nuance Communications?

Nuance Communications (NUAN) will release its quarterly report on Monday, and shareholders have had to deal with a steady drop in the voice-recognition specialist's share price over the past two years. Despite attempts from Carl Icahn and his Icahn Enterprises (IEP -0.12%) to try to stir Nuance to take action to boost its share price, Nuance hasn't been able to use its success in providing Apple (AAPL -0.35%) with its Siri service to extend its profitability and become a more compelling growth story.

For years, Nuance Communications has lured investors with the promise of being the go-to provider of voice-recognition services not just within technology but for a wide variety of different applications. Yet despite earning its spot in the iPhone and iPad with Siri, Nuance has had a lot of trouble getting its successes to translate into bottom-line profit growth. Will Icahn manage to inspire Nuance to find new ways to boost earnings, or is Nuance stuck in the same position that many Apple-reliant suppliers are in, relying on growth from a major customer? Let's take an early look at what's been happening with Nuance Communications over the past quarter and what we're likely to see in its report.

Stats on Nuance Communications

Source: Yahoo! Finance.

Will Nuance Communications bounce back this quarter?
In recent months, analysts have held firm on their views on Nuance Communications earnings, keeping their short-term and long-term estimates all unchanged. The stock hasn't held up nearly as well, though, falling another 16% since late August.

The biggest problem that Nuance faces right now is that it has had to accept changed terms under which it gets paid for its service. In the past, Nuance was able to collect payments based on demand for the devices that included its voice-recognition services. Now, though, customers are moving to payment arrangements that pay Nuance based on the actual use of those services. As a result, for the millions of Apple device owners who never use Siri, Nuance will no longer receiving compensation, causing near-term pressure to revenue and profits.

In that light, the activist moves from Carl Icahn have been a bit of a distraction. In August, Nuance implemented shareholder-defense measures designed to prevent Icahn from acquiring a more substantial stake in the company than it already has. Yet with Icahn also having bought a substantial position in Apple stock, some analysts have speculated about the possibility that Icahn could push Apple toward buying Nuance outright in order to bring Siri and Nuance's voice recognition expertise in-house. With Apple working to develop its own voice-recognition alternative to Siri, though, it might see no reason to buy Nuance.

One key area where Nuance could find more growth is in electronic health records. With the ability to transform spoken instructions into digital records, Nuance could help revolutionize the high-growth area. Already, the niche has been a source of growth for Nuance, with revenue from health care rising 29% in its most recent quarter, compared to a 16% drop in its consumer and mobile segment.

In the Nuance earnings report, watch to see how the transition from device-based to service-use-based revenue arrangements is going. In the end, the company will have to boost not just the availability of its voice services but also their actual use in order to reawaken the growth that has abandoned the company recently. Neither Icahn nor Apple is likely to be the one to help Nuance on that path.

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