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INNOVATION
& DESIGN Home Page Architecture Brand Equity Auto Design Game Room SMALLBIZ Smart Answers Success Stories Today's Tip INVESTING Investing: Europe Annual Reports BW 50 S&P Picks & Pans Stock Screeners Free S&P Stock Report SCOREBOARDS Hot Growth 100 Mutual Funds Info Tech 100 S&P 500 B-SCHOOLS Undergrad Programs MBA Blogs MBA Profiles MBA Rankings Who's Hiring Grads | | DECEMBER 7, 2000 STREET WISE By Amey Stone Words for the Wise on Voice Recognition The technology really works, and the two market leaders sure have supporters. Too bad these stocks'volatility is as great as their promise
Nothing could be further from the truth. Speech-recognition software moved into the mainstream this year -- although not in the applications L&H focused on (primarily dictation to PCs), and not in a way that has made this arena any easier for investors. The problem: This is a still a wild and woolly sector that is likely to stay that way for awhile. A NOVELTY NO LONGER. The two clear leaders of the new wave are Nuance Communications (NUAN) and SpeechWorks International (SPWX), both of which use voice technology to automate telephone calls. Airlines, brokerages, and banks are among the early adopters of new systems that allow customers to use simple voice commands to cancel flights or get stocks quotes over the phone. Telecommunication companies also are signing up to provide services like voice-automated dialing, which save them big bucks over the cost of hiring human phone representatives to route calls. "We've really only just scratched the surface," says Stuart Patterson, SpeechWorks' CEO. "Every time you press a button on the telephone, think about how much easier it would be if you could just tell the network what you want." This technology is also powering a new kind of Internet access that allows users to dial into "voice portals" and access information off the Web -- a trend represented by outfits such as HeyAnita, backed by SpeechWorks, and TellMe, powered by Nuance. SpeechWorks also has a "text-to-speech" product that America Online and Yahoo have recently implemented so users can call in to have their e-mails read to them by a computer. Nuance has what some analysts consider the most advanced product technically -- a "voice browser" with a suite of functions that allows users to surf the coming "voice Web." EXPERIENCING STATIC. "We've been through the stage of 'Oh my God, it works!'" says Ronald Croen, CEO of Nuance. "Now people know there are two companies that can make it work," he says, adding that he thinks the next stage, not surprisingly, will see customers decide Nuance's technology works better. "I feel very strongly that this is the beginning of the next wave," says Dan Spiner, a managing director at Progressive Strategies, a research firm which evaluates the equipment. Spiner, who gives Nuance the technological edge but rates SpeechWorks a close second, sees parallels with the Internet's growth of three to four years ago. "Voice technology might be another wave very similar to what we had in the past," he says. For investors, that prediction should be words of warning. Both Nuance and SpeechWorks soared following their initial public offerings earlier this year and have been riding a roller coaster ever since. In mid-August, Nuance reached a high of $182 a share while SpeechWorks hit $109, which put their market caps in the billions of dollars. Both companies are increasing sales at a better than 100% rate over the prior year, but Nuance had revenues of only $34 million for the first nine months of this year and isn't expected to be profitable until mid-2002. SpeechWorks had only $20 million in revenues the first three quarters of this year with profits not anticipated until late in 2002. THE FEAR FACTOR. In early November, though, both stocks went into free-fall. CIBC World Markets analyst John Corcoran believes the plunge reflected a delayed reaction to the Internet meltdown combined with investors' new aversion to money-losing startups. "These stocks are related to the Internet, but it has taken investors a while to figure out how," he says. November also was the time investors were gripped by fears of a slowdown in telecom spending, since telcos are important customers of both Nuance and SpeechWorks. Meanwhile, news of "irregularities" in L&H's books began to spread, and short-sellers also took note as an end to restrictions on the sale of huge blocks of shares by insiders approached -- late December in Nuance's case, late January for SpeechWorks. Finally, in the third quarter, Nuance sparked concern when it reported that while total revenues were higher than expected, there had been a slight slowdown in domestic sales over the prior quarter -- an event most analysts dismiss as a mere blip. Nuance fell to $31 a share by the end of November while SpeechWorks dropped to $25. A couple of bullish days on Dec. 5 and Dec. 6 pushed Nuance back up to $44.69 and SpeechWorks to $40.25. "They should be up that much" after such a steep slide, says Donald Newman, an analyst with Ladenburg, Thalmann & Co. He doesn't rate SpeechWorks but has a neutral rating on Nuance, mainly because it still has a long way to go before turning a profit. "A lot can happen between now and then," he says. But many on Wall Street believe this is a buying opportunity and regard the worries that sparked the November slide as overblown. Corcoran, who puts the two companies' total market opportunity at $10 billion by 2005, initiated coverage on Nov. 22 with an $82-a-share price target on Nuance and a $60 target on SpeechWorks. Although the companies are related to the Internet, "what is going to drive continued execution is the offline world," says Corcoran. "The cherry on the float is the potential of what can happen with the voice Web," adds Brian Ruttenbur, an analyst with Morgan Keegan & Co. He has a price target of $105 a share on Nuance and $80 on SpeechWorks. SOUND FUTURE? Some perceived negatives may actually turn out to be positives. For example, telcos may add speech services as a way to boost revenue. "We are actually seeing some demand," says Patterson, since voice-automated dialing can be another service for which they can charge their customers. Likewise, problems at L&H could be a positive. Croen says even though Nuance usually doesn't compete much with L&H, it is already fielding calls from that company's partners, who may be looking to make a change. Voice-recognition profits remain far away, but both companies have plenty of cash. SpeechWorks has over $100 million in the bank and Nuance has $225 million. For now, analysts don't recommend one stock over the other, since they trade in tandem, but they suggest that investors buy both. "There is clearly room for both to succeed and grow quite large," says Corcoran. "Both were overvalued and overhyped," says Ruttenbur. "I think they are now reasonably priced and, given their growth prospects, should be bought at this level." The bottom line: While speech-recognition software is becoming increasingly mainstream, it may remain a treacherous area for investors. If you miss the excitement of investing in the Internet's early days, when new technology was powering applications that seemed revolutionary, this is a sector to explore. But you can easily be forgiven these days if those same Internet memories make you want to stay far, far away.  Stone is an associate editor at Business Week Online Edited by Beth Belton  | | |
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