This one is a little more uplifting than Herbie, from Forbes, August 7, 2000:
Investors have punished Lernout & Hauspie for its questionable accounting practices. But these problems should not obscure its leadership in voice technology.
Muffled Voice
By Deborah Orr
Nasdaq-listed Lernout & Hauspie Speech Products lost 16% of its value on July 5, the first trading day after the Belgian company published details of its first-quarter results. In May the company had announced a 49% rise in worldwide profit to $12 million, but the regional distribution of sales and earnings were made public on June 30 in a filing to the U.S. Securities and Exchange Commission. Investors were puzzled about the unusual surge in orders from Korea (to $59 million) at a time when sales in the rest of the world fell by 27% (to $52 million).
Lernout & Hauspie's chief executive, Gaston Bastiaens, explains that the volatile sales trends are due to a recent change in strategy: Overall, the company aims to rely less on one-time sales of its speech software and more on creating recurring revenues through joint product development with voice portals, service providers and other clients. Gains in Korea were due to the acquisition of a local company.
Ronald Emrick, vice president of investments at Prudential Securities, which holds a position in Lernout & Hauspie, is not worried by the fall in U.S. and European earnings. He believes that revenues will start to pick up soon, as the 86 new contracts signed in the first quarter start to bear fruit.
But the stock market's skepticism is more deeply rooted than just one quarter's figures. The U.S. Securities and Exchange Commission forced the company to restate its results for 1997 and the first nine months of 1998 because they inflated the losses arising from R&D writeoffs in connection with the purchase of 12 companies. This restatement had the effect of lowering the firm's reported losses in 1997 and 1998 and reducing profits for later years.
But such restatements are not unusual among high-tech companies growing fast through acquisitions. Netscape and dozens of other companies restated 1998 earnings for the same reason. Lernout & Hauspie never actually broke the law, but Bastiaens is employing a more conservative accounting method for new acquisitions.
With the $934 million acquisition of Dictaphone, the U.S.-based dictation and recording system firm, earlier this year, Lernout & Hauspie will book revenues only when the systems it sells are in operation, rather than merely signed for, explains Rob Stone, a Boston-based analyst for SG Cowen.
But some investors, including a vocal pack of short sellers, seem more concerned about the poor presentation of Lernout & Hauspie's accounts than about the underlying value of the company. They're overlooking the fact that it's the only profitable firm in voice technology, demand for which is expected to boom as mobile Internet appliances grow in popularity.
Want to find out where you are on an electronic map while driving? Lernout & Hauspieis working with Visteon and Delphi, two of the world's biggest car-parts makers, to enable drivers to obtain directions by means of voice-activated maps. What about accessing a web page from your cell phone? Chances are you will soon hear the contents read by a voice from Lernout & Hauspie's labs. Many of the world's voice portals already use the company's "RealSpeak" product, which converts computer text to almost-human sounding speech.
Products such as these have helped to boost the stock from a split-adjusted $2.75 to $36 since it listed on Nasdaq five years ago, giving the company a market capitalization of $5 billion. Revenues have grown from $31 million in 1996 to $344 million last year, the first year the company turned a profit. Blue-chip investors include Microsoft (about 6%), Putnam Investments (5%) and Oppenheimer Funds (3%).
How did Lernout & Hauspiegain this following? Persistence is one reason. The firm's Belgian founders--Jo Lernout and Pol Hauspie--have been plugging away singlemindedly at voice-recognition software since the 1980s.
Lernout was first drawn into speech technology while a young salesman at Wang Computers in 1982. He was in charge of selling Wang's speech synthesizer for voice-mail systems in Western Europe. "Unfortunately, the system spoke only English," laughs Lernout. He could see the potential for a European product that spoke more than one language. His home of Flanders turned out to be the perfect place to develop the software, because engineers there grow up speaking French, Dutch, German and English.
In 1987 Lernout teamed up with Hauspie, an old friend, to start a voice-tech business in the Belgian city of Ieper (or Ypres in French). Hauspie was a computer nut who sold an accounting business he inherited from his father and put $100,000 into the new business. Lernout sold his house to raise $100,000, and other investors joined with another $100,000.
After two rounds of financings--including one that brought in $15 million from local farmers and textile merchants around Ieper--the company floated on Nasdaq in 1995. Together Lernout and Hauspie still own 15.5%, worth $795 million. They became cochairmen in 1996 and appointed Bastiaens, a former Philips man, to be CEO.
By today's standards, 20 years may seem like a long time to nurture a startup. But the development of voice and translation technology goes back to World War II, when scientists in the U.S., Russia and Britain tried to crack coded enemy messages. But creating a computer program to recognize and respond to the human voice requires enormous amounts of memory and processing power, so most early attempts to codify and process speech ended in frustration.
Now, with processing power doubling every year and memory prices falling, speech technology has become a commercial proposition. But teaching computers to speak and listen requires more than raw processing power.
Computers need vast amounts of information to understand and interpret different languages, accents and voices. This is where Lernout & Hauspie's 2,200 engineers, translators, linguists and editors have a competitive edge: They have access to the company's huge archive of recorded voice data, which the company estimates as equivalent to the number of words that 35,000 people will speak over the course of a year. "In our business there is no data like more data," jokes Lernout.
The company is gaining more specialized data through acquisitions, most notably the purchase of Dictaphone. The $350 million (1999 revenues) company came with a vast store of audio data from reams of medical and legal transcriptions.
Bastiaens wants to combine Dictaphone's know-how with its own European and Asian language software to offer transcription services for hospitals around the world. And it has launched a service called i-Chart, which enables outpatient clinics and even the smallest medical practice to download transcription software off the Internet.
Lernout & Hauspie is not the only voice technology company in the business. IBM, Philips, Lucent and AT&T are also involved, but for them voice technology is a low priority. "There seems to be an attitude among management that the research has to come up with a product before management will pour serious money into development," says Lernout.
His firm faces stiffer competition from small startups. These include Nuance, a Silicon Valley company that listed in April. Nuance specializes in voice recognition for use in telephonic applications such as call centers and appears to be outselling Lernout & Hauspie in this category in the U.S. But competitors expect Dragon, a recent $460 million acquisition by Lernout & Hauspie to give Nuance a run for its money. Dragon has some of the best engineers in the business and one of the most promising patent portfolios.
In the text-to-speech category, Lernout & Hauspie's software is giving voice to scores of new applications every quarter--and at gross margins north of 90%. Despite the background noise from short sellers, Lernout & Hauspie is a company worth listening to.
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