By Gary Flood
Lernout & Hauspie Speech Products, BV, has swooped on battered fellow Automated Speech Recognition (ASR) player Kurzweil Applied Intelligence, Inc, buying the long troubled supplier of specialized medical and more generic Windows-based dictation systems for $53m. For L&H, the swiftly growing European speech software maven, the move consolidates its position as leader in this intriguing, but still small, market. Based in Ieper (Ypres), Belgium, the Nasdaq-traded company has been on something of an acquisition spree these past six months, swallowing four small European language translation companies and privately-held $5m turnover ASR specialist Berkeley Speech Technologies Inc last November. But this deal is all about short-circuiting time to market for its in-development large vocabulary, speaker- independent, continuous dictation product by six months, rather than simply growth for its own sake. It seems that the firm is under contract from a body calling itself the Dictation Consortium to produce such a product. L&H is in discussions with the Consortium’s members – a group of Belgian investors – to directly participate in the acquisition, perhaps paying Lernout up to $26m, fifty per cent, of the cost against future from income from 1998 product sales. The group has paid L&H at least $5m, possibly much more, to kick-start such a development and secure an exclusive license to the thing once finished. This internal project was credited with $2.5m revenue in the company’s fourth quarter results for L&H’s first year as a public company, ending December 31st last. Kurzweil, based in Waltham, Mass., a 15 year old company with 110 employees, has had a most unfortunate recent history; its former CEO Bernard Bradstreet was jailed last year after Federal investigations concerning inflated sales figures and all-round shady dealings such as concealment of losses prior to its 1993 IPO. The case and the attendant publicity has crushed the company’s share price, which hovered around $4 yesterday, up nearly 40% on the news of the sale, below its 52-week high of $5 but at least up from its nadir of $1.625. Despite its troubles of these past three years, L&H says it still thinks Kurzweil is a good buy – indeed, cheap at this price, it claims, given the amount it expects to recoup off the dictation product once it starts selling. The addition of the 67-strong Kurzweil R&D team is hailed as a coup, for instance, and the company’s help in adding its American English expertise will be highly useful in rounding out the eventual finished dictation product. The deal is made up mostly of cash, 80%, with newly- issued L&H paper making up the other 20%. Kurzweil shareholders will in fact get $4.20 in cash and $1.05 in L&H stock for each share of their common stock. Though the deal is due to be completed within three months, L&H is making a line of credit of up to $1.5m available to Kurzweil to tide it over. This may have something to do with how bent out of shape Kurzweil’s balance sheet is looking. Kurzweil’s unaudited 1997 figures (ending January 31st) show a sharp increase in losses against fiscal 1996 – a rise on the debit side from $2.6m to $4.2m on sales down from 1996’s $9.4m to only $8.5m. Its cash pile has declined precipitously, from $2.1m in 1996 to only $456m. The company attributes the problem to the fact that it only managed to get its Windows product out in the second half of the year, giving it a poor first couple of quarters from which it never really recovered, but adds that that business is now showing a nice [growth] curve. L&H says it will continue to sell and support Kurzweil’s existing product lines, the special-vocabulary medical dictation systems, plus Kurzweil Voice, a generic voice- recognition system running under Windows and a voice-enabled word processor called VoicePad, and that the company will be run as a wholly-owned subsidiary. Learnout & Hauspie, which is four times Kurzweil’s size in revenue terms at $31.0m for its last fiscal and about four times bigger in headcount too, has earned much kudos in the 11 months since its flotation from its a licensing deal with Microsoft for its automatic speech recognition and text-to-speech products. L&H’s shares hit a high of over $53, just after its May 1996 IPO, but the market was relatively unimpressed with the news of the deal yesterday, closing down 5% to just under $20. Its fourth quarter and year ending December 31st results showed total revenues of $31.0m and a net loss of $7.9m, compared to $7.7m revenue and a loss of $14m for its previous twelve months, an impressive 400% revenue growth – but the 1996 figures included an in-process R&D write off due to all those acquisitions of $11.5m. Kurzweil may have lost its independence but this is probably the best place for it have ended up – in the arms of the company that still seems to have covered all the right bases in ASR. So it seems we must expect some kind of humdinger large-vocabulary dictation product out of L&H sometime before the end of the year, and if we don’t, we’ll have to question how many of those 67 American speech researchers decided to stick around and work for the Belgians. We think most will.