Thanks zermellow (35/M/Toronto) from the yahoo board
juan
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Lernout & Hauspie Shares Drop
Amid Puzzling Revenue Results
By MARK MAREMONT and JESSE EISINGER
Staff Reporters of THE WALL STREET JOURNAL
Belgian software company Lernout & Hauspie Speech Products NV said nearly
all of its revenue growth in recent quarters came from an unusual surge in
orders from Korea and Singapore, where it previously had negligible sales.
Lernout shares declined 16%.
Separately, a Belgian analyst cut his earnings forecasts for the company, citing
Lernout's application of more conservative accounting practices to two new
acquisitions of companies that previously had been employing more liberal
methods.
In 4 p.m. Nasdaq Stock Market trading Wednesday, Lernout was down
$6.9375 at $36.8125.
Lernout, the world leader in speech recognition and translation software, has
been a highflier recently, with its revenue rising more than 60% last year to
$344.2 million, after more than doubling the prior year. Its stock, although off
its highs earlier this year, also has soared, valuing the company at more than $5
billion before Wednesday's fall.
But throughout its 13-year history, Lernout has been a lightning rod for
criticism, with skeptics citing concerns about the impact of revenue derived
from related parties, along with the company's penchant for serial acquisitions,
which made it tough to follow its financial statements.
First Filing as U.S. Concern
More recently, some critics have focused on a huge jump in sales to Asia in
1999 and this year's first quarter. But the company hadn't publicly disclosed a
detailed breakdown of those sales until late Friday, when it filed its first
financial statements with the Securities and Exchange Commission as a U.S.
company. Lernout had been filing under less stringent rules as a foreign
company, but had to start filing as a U.S. company due to its recent acquisition
of Dictaphone Corp.
In the filings, Lernout said it received $58.9 million in revenue from Korea for
the first quarter, an enormous jump from $97,000 a year earlier. In this year's
first quarter, Korea contributed 53% of the company's world-wide sales of
$110.7 million.
Meanwhile, total sales in the U.S., Europe and the rest of Asia declined 27% in
the latest quarter, to $51.8 million.
Out of 1999 revenue of $344.2 million, the latest filings disclose, Korea
contributed $62.9 million, while Singapore contributed $80.3 million -- with
Singapore just edging out the U.S. as the country's largest market. The prior
year, the two countries had contributed less than $300,000 in sales. While the
company paid about $50 million in September to acquire Korean company
Bumil Information & Communication Co., it made no significant acquisition in
Singapore during 1999 or this year.
Analysts said they hadn't previously understood Singapore's importance to
Lernout's 1999 results, and found the sudden surge in sales to the two Asian
countries puzzling. "We viewed the geographic distribution of the business
coming out of 1999 as pretty unusual," said Brian Skiba, analyst at Lehman
Brothers in London, who has been bearish on Lernout. "Clearly the first quarter
didn't dispel that view."
Yet sales in Singapore plummeted in the first quarter of 2000 to $501,000,
down from $10.4 million a year earlier.
Shift in Strategy
Gaston Bastiaens, Lernout's chief executive, said U.S. and European sales had
fallen recently because of a shift in strategy. Rather than license its underlying
technology to companies that would then develop applications for specific
markets, he said Lernout more than a year ago decided to build its own
applications, allowing it to gain more revenue over time. The Lernout chief said
he expects "a substantial surge" in revenue in the U.S. and Europe for the third
and fourth quarters as the strategy shift begins to show results.
As for Asia, Mr. Bastiaens said the strong revenue is a result of Lernout's early
market presence and lack of strong competition. The big sales in Singapore last
year, he said, came mostly from licensing of Lernout's technology to
companies that are building local-language versions of its systems for
languages such as Hindi and Tamil. Lernout is selling local-language licenses
for $2 million to $4 million apiece, he said. Singaporean sales dropped off
sharply this year because most of the major language licenses already have
been sold.
In Korea, Mr. Bastiaens said the company it acquired in September 1999,
Bumil, was running at an annual sales rate of about $12 million. Sales quickly
soared to nearly four times that level in the fourth quarter alone, he said,
because Bumil gained access to all of Lernout's technology, while Lernout was
able to sell to Bumil's large base of clients. Customer acceptance has been
strong in markets such as securities and telephony, the CEO said, adding that
Korean sales in the just-ended second quarter were "in the same ballpark" as
the first quarter's. He also said he expected Korean sales to be even higher in
the second half of 2000.
Analyst Cuts Estimates
Separately, Patrick Michielsen, an analyst for the Belgian-Dutch Fortis Bank,
lowered his revenue and earnings estimates for Lernout. The analyst cut his
second-quarter revenue estimate to $138 million, down from $173 million, and
his earnings-per-share estimate to three cents from 18 cents. He cut his
earnings estimate for the year to 59 cents a share from 86 cents a share and
lowered his price target on the stock to $61 from $70.
In a report dated July 3 but that was widely disseminated Thursday, Mr.
Michielsen cited Lernout's "more conservative accounting policy" for
recognizing revenue, compared with the policies of two U.S. companies that
Lernout recently acquired, Dictaphone and Dragon Systems Inc. Lernout
previously had warned about a negative short-term effect of the
accounting-policy shift at the acquired units.
Mr. Michielsen maintained his buy recommendation on the stock, saying the
company "could be a key player" in the market, but said there could be some
pressure on the stock in the short term. He couldn't be reached for further
comment.
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Lingering Questions
Snapshot of Lernout & Hauspie
Headquarters: Ieper, Belgium
CEO: Gaston Bastiaens
Founded: 1987
Employees: 2,500
1999 Revenue: $344.2 million
1999 Net income: $40.2 million |
