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...

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