Hmmm... In my opinion, this one doesn't seem to pass the smell test...
interactive.wsj.com
August 8, 2000
Heard on the Street
Lernout & Hauspie Grows
Rapidly, Raising Questions
By MARK MAREMONT, JESSE EISINGER and MEEYOUNG SONG
Staff Reporters of THE WALL STREET JOURNAL
With its historic wariness of foreigners and powerful chaebol
conglomerates, South Korea can be a tough market for outsiders to crack.
But not if you listen to Belgian-based Lernout & Hauspie Speech Products
NV.
A year ago, the computerized voice-recognition software concern had
negligible Korean business. Then, in 1999's fourth quarter, Korean sales
jumped to 42% of revenue. In the next quarter, this year's first, Korean
sales surged again to more than half of revenue, and at $58.9 million were
607 times the $97,000 recorded a year earlier. Meanwhile, Lernout &
Hauspie sales in the rest of the world fell.
Gaston Bastiaens, L&H's chief executive, says Korean business took off
because of last September's acquisition of Bumil Information &
Communication Co., a Korean high-technology company. Although Bumil
then had quarterly revenue of only about $3 million, Lernout says the
company provided entree to many Korean firms that became substantial
customers, and L&H benefited from its early market presence and lack of
competition.
But some companies that L&H has identified as Korean customers say
they do no business at all with L&H. Others say their purchases have been
smaller than L&H says. L&H officials now acknowledge they made some
mistaken initial representations about customers. But the company disputes
other accounts given by some of the Korean companies, and it insists its
Korean revenue figures are accurate.
The discrepancies raise questions of credibility at a company that is both
one of Europe's high-tech stars -- and a perennial target of skeptics. As
the company grew rapidly during the past several years, detractors have
raised concerns about the company's aggressive acquisition strategy, which
makes it hard to compare financial results over time, and its sales to
affiliated entities, which last year accounted for 9.7% of sales and include
companies in which L&H invests.
So fast have the Korean sales grown that a stock analyst at Lehman
Brothers has effectively suspended coverage of the company, having halted
writing on the company as his firm inquires about the Korean sales. "It
remains very difficult to find customers in Korea and around the area doing
large, successful implementations of their voice-recognition software," says
Brian Skiba, the London-based Lehman analyst and a bear on the stock.
Still, despite some ebbing of its stock price, the Nasdaq Stock
Market-traded company -- with joint headquarters in Ieper, Belgium, and
suburban Boston -- has a stock-market value of $5.25 billion, a rich price
of more than 60 times the 2000 consensus earnings estimate. Since
year-end, L&H shares are up 60%; at 4 p.m. Monday, they were up
$1.63 to $37.
In Korea, Mr. Bastiaens says L&H sells a range of products, including
software licenses and automated phone switchboards that recognize voice
commands. In May, while being questioned about the Asian sales by a
reporter, he volunteered the names of about a dozen Korean customers.
Later, the CEO provided ranges of the dollar amount of business done
with those and some other customers. Subsequently, the company
disclosed more names. In all, 18 of about 30 companies claimed by L&H
as customers were contacted by this newspaper.
Three of the companies say they aren't, in fact, L&H customers. L&H says
one of those was a former Bumil customer, and was mistakenly put on its
list. Three more companies say their purchases from L&H over the past
three quarters were smaller than figures provided by Mr. Bastiaens or Sam
Cho, vice president of L&H Korea. One additional company says it is in a
joint business with L&H that produces considerably less revenue than
L&H claims. Officials from an eighth company initially said it had formed a
joint venture with L&H and that the joint venture, not the company itself,
had purchased products from L&H. Later, the company retracted this
initial version.
Of the other 10 companies, three confirm they are customers but wouldn't
give the size or timing of their purchases. Officials at another six confirm
total purchases totaling $450,000 to $5.5 million in the period since L&H
took over Bumil. One company, Artlab Co., says it signed a $10 million
contract with L&H and paid in May, a figure that was within the revenue
range provided by Mr. Bastiaens. Meanwhile, Hanwha Securities Co.
ordered nearly $2 million of gear, says an official, adding that L&H "is
highly recognized" for its technology.
All told, of the 13 companies that responded to inquiries about their
purchases from L&H in the period since it acquired Bumil, the revenue
tallies roughly $32 million. From all of its customers in Korea, in 1999 and
the first quarter of 2000, L&H posted $121.8 million of Korea sales, and
it has said that it expects second-quarter revenue from that country to
exceed the first quarter's $58.9 million. The company is expected to report
second-quarter results Monday.
Among the companies that L&H boasts as customers: Korea Securities
Computer Corp., or Koscom, a government-regulated clearing house for
stock trades. Mr. Bastiaens initially says L&H received revenue in the
range of $5 million to $10 million (he wouldn't be more specific) from
Koscom in the three quarters ended June 30. According to two Koscom
officials, whose names were provided by L&H, Koscom and L&H are
partners in an automated phone stock-quote service. Korea Telecom
collects the per-call payment, keeps 10% and splits the rest between
Koscom and L&H.
One of the Koscom officials estimates L&H and Bumil's share of the
revenue at roughly $1.5 million in 1999. Told of the discrepancy, L&H
contradicts Mr. Bastiaens and puts the Koscom revenue in the range of $1
million to $5 million.
In a Dec. 28, 1999, press release, L&H said Samsung Securities, a big
Korean brokerage, together with more than 14 other securities firms, had
"selected L&H to develop client server solutions for online trading and
automated dialogue systems." But two Samsung officials, including
spokesman Shin Dong Woo, say their firm never made any purchases from
L&H, although they discussed some.
Asked about the discrepancy, Mr. Bastiaens says Samsung isn't a "direct
customer" but an "indirect customer." Pressed on what "indirect" means,
L&H Korea's Mr. Cho says some Samsung customers also conduct
trades over the Koscom-L&H phone-quotation system, and Samsung
remits a portion of the trading fee to Koscom, which shares it with L&H.
L&H also claims LG Electronics as a customer. But Yu Won Uk, a senior
research engineer at LG Electronics -- a contact provided by L&H -- says
his company never bought products or licenses from L&H. Instead, he
says the two firms briefly worked on a joint project for applying voice
recognition to television, but stopped because there "was no progress." LG
Electronics paid L&H only "engineer charges," he says, akin to labor costs
for L&H's share of the work on the failed project.
L&H officials deny Mr. Yu's account. Mr. Cho says that LG Electronics
has paid L&H for the software license and that LG Electronics' project
using its technology is ongoing.
Another Korean company with which L&H says it has a significant
relationship is Hung Chang Co., a maker of communications equipment.
Mr. Bastiaens put revenue from Hung Chang in the range of $5 million and
$10 million over the past three quarters.
However, Kim Ho Kyun, a Hung Chang official whom L&H identified as
its contact, says Hung Chang wasn't using L&H products internally and
that L&H's $5 million bill was paid by a joint venture called Spia, "not
Hung Chang." Another Hung Chang official, Choi Sang Hyun, who was
reached independently of L&H, says Spia Co. was founded May 2, with
Hung Chang as the largest shareholder, but June 28 L&H Korea became
the largest, with Hung Chang holding 27.49%. Mr. Choi says Spia makes
products based on L&H's voice-recognition technology, and says Hung
Chang is only a passive shareholder.
L&H's Mr. Bastiaens initially said a joint venture with Hung Chang didn't
exist. Now L&H acknowledges Spia's existence. "I believe Gaston wasn't
fully aware that it had been set up," says L&H's senior vice president of
finance Allan Forsey. L&H maintains that Hung Chang paid L&H for
products, and that L&H is among 20 investors in Spia, with Hung Chang
having the largest holding.
In a follow-up interview after both companies were asked about the
discrepancies in their initial accounts, Mr. Kim denies his first version of
events. Assume, he says, "I lied about everything." A third Hung Chang
official agrees with L&H's ultimate version.
Mr. Bastiaens also identified Hyundai Securities and Hanvit Bank as
providing revenue totaling between $5 million and $10 million. But at
Hyundai Securities, two officials, including a contact provided by L&H,
say their purchases amounted to just over $1 million. At Hanvit Bank, Lee
Jae Bong, manager of network management, says the only contract signed
by his institution tallied $150,000. L&H officials now say that Mr.
Bastiaens may have been furnished mistaken information.
Write to Mark Maremont at mark.maremont@wsj.com, Jesse Eisinger at
jesse.eisinger@wsj.com and Meeyoung Song at
meeyoung.song@awsj.com |
