Wednesday, September 24, 2008

Is Nuance the Second Coming of Lernout & Houspie?

Over at the gethuman blog, speech industry analyst Walt Tetschner has a provocative piece asking whether Nuance Communications is starting to look like a rerun of Lernout & Houspie, the Belgian company that rolled up speech-recognition companies, but collapsed in 2001 due to an accounting scandal.

(Nuance, then known as ScanSoft, bought up many of the L&H assets.)

Tetschner, who runs the firm Voice Information Associates, writes:

    Nuance continues to be a house-of-cards that is likely to come crashing down. The only question is when. Nuance does not generate GAAP profits. It shows proforma profits by excluding a huge amount of stock compensation. Naive investors buy the stock based on distorted information from top management, but knowledgable management keeps selling the stock. The growth rate is inflated through acquisitions that are enormously over-priced. A lack of transparency and distortion of the truth by Nuance top management continues to make it a challenge to figure out just what Nuance is really doing.

    The activities of Nuance Communications bear a striking resemblance to what L&H was doing prior to imploding in early 2000.

    Belgian-based L&H was once the world's leading maker of speech technology software. In early 2000, reports of accounting irregularities surfaced that prompted arrest of the company's founders. It sought reorganization under bankruptcy laws in the United States and Belgium. The situation led in October to the firm being declared insolvent and its assets being put up for sale.

    A few of the more obvious similarities are 1) a highly aggressive M&A program that was attempting to eliminate competitition and 2) constant distortion of reality by the corporate management.

    The two companies routinely grossly overpaid for acquisitions that were being made. They then attempted to distort this. For example: Nuance is paying $160 million for SnapOn and is then attempting to distort this by measuring with speculative future revenue contributions.

It's a fiery piece worth a read if you're in the speech rec space...

Labels: , , ,


Anonymous Anonymous said...

Walt is a well known crank in the industry. It's shocking to me that anyone pays attention to what he has to say. His post is littered with emoticons with their tongues sticking out.

As with his critiques of telephony automated applications, in this analysis he does not offer many facts to bolster his claims.

I'm not saying that I'm a fan of Nuance. In fact, far from it. While they have the best tech in the industry, their management is not employee friendly. I do see their litigious behavior worrisome.

Paul Ritchie is driven by the desire to dominate any industry he plays in. I'm sure that there is some measure of greed in there.

Also, in public companies, it is very common for executives to sell off their shares quite frequently. Most (if not all) will have algorithmic stock plans set up to sell shares at predefined intervals.

September 24, 2008 12:28 PM  
Anonymous Walt Tetschner said...

Nuance responds! It should be apparent that this is coming from Nuance. Too bad that they don’t have the courage to admit it and instead hide behind a poorly done cover.

Nuance starts with character assassination. Classic approach! If you aren’t able to argue the facts, then you resort to this.

Next, Nuance states that claims are not supported by many facts. Most of the statements that I made were simply a statement of fact that is difficult to refute.
Curiously, Nuance does defend the insider stock sales.

Nuance states that “they have the best tech in the industry”, which makes it clear that this was written by Nuance. Outside of Nuance, it’s virtually impossible to find anyone in the industry that would agree with this. If Nuance had better technology than vlingo, then they would not be suing vlingo.

Perhaps Nuance is looking for a more detailed presentation of each of the sixteen (16) items so that they can better understand what they mean. We will do this. Stay tuned!

Nuance defends the insider sales by claiming that “everyone does it”. Nuance executives selling Nuance stock is difficult to see as something that supports a long-term confidence in the company.

Here are some facts:
On Friday, May 30. 2008, four top Nuance executives sold over 300,000 shares of Nuance stock for almost $6 million, Share price was over $19.75.

Nuance had a public stock offering on Tuesday, June 4, 2008. By June 11, 2008 (a week after the public stock offering) Nuance’s stock price had dropped to $15.80, which represented almost a 20% decline. This looks like a pretty clear case of violating insider trading regulations.

This does not appear to be an isolated instance at Nuance.

Table NS-1 is a summary of the Nuance stock sales that were done by Nuance insiders during the last year showing the sales amount and the timing. Note that insider sales spiked during fiscal Q1, 2008 and fiscal Q3, 2008 and that the bulk of the sales in these two quarters were made just prior to the announcement of a public stock sale by Nuance. This seems like an incredibly inappropriate (and illegal) thing for Nuance executives to do, considering how punitive insider trading laws are. Selling stock just prior to a public stock sale is a huge no-no.

Table NS-1
Nuance Insider Stock Sales During Fiscal 2008
Q4, 2008 Q3, 2008 Q2, 2008 Q1, 2008
Shares 150,000 586,171 209,793 691,303
Sales x$000 $2,291 $11,280 $3,562 $12,637
NI (GAAP) NA -$9,866 -$13,723 -$15,425

October 10, 2008 11:01 AM  
Anonymous senti said...

The emoticons with tongues sticking out in Walt's post are a (mis-)rendering of the html paragraph < p > tag.

November 4, 2008 11:28 AM  

Post a Comment

Links to this post:

Create a Link

<< Home