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LHSP Gorilla Game Analysis


LHSP Gorilla Game Analyis or Do Gorillas Understand English?

OVERVIEW

Last week, in one of those "New Economy Bites Old Economy" stories, a relatively unknown Belgian company called Lernout & Hauspie Speech Products bought old American standby Dictaphone using -- you got it -- its increasing stock strength to do it. With the purchase, LHSP's most important product -- speech recognition -- took another major step in knocking down an important bowling pin -- medical transcription. With its technology across the chasm and knocking down those pins, LHSP deserves a thorough analysis of its gorilla potential.

LHSP is one of those messy companies that seems to be focusing on everything at once, unlike RMBS or QCOM, whose gorilla-ness focuses on the adaption or un-adaption of one core technology. The Belgian company has its hands in everything from automatic speech recognition to text to speech technology to digital speech compression to text-to-text translation and linguistic-oriented software components.

LHSP has so many things going on -- PDA's which translate e-mail to speech and your spoken response back to email, next generation telephony applications that automate call centers, RealSpeak (www.ananova.com and http://www.lhs.com/realspeak/demo.cfm), etc -- it's difficult to know where to focus. However, it seems clear that the thing that's getting all the attention is speech recognition, period.

Considered the leading speech technology company, LHSP has worked for years bringing this technology to its present point, on the cusp of considerable assimilation. Today, LHSP has more than 50 patents on the technologies, a considerable lead in translation and non-English recognition, high-profile strategic partnerships with leaders like MIcrosoft, Intel, and GTE, and the broadest array of market offerings in speech and language solutions across a range of industries.

Market Description

Customers
Companies partnering with LHSP for speech technology include AOL, GTE, Hitachi, Intel, Lucent, Microsoft, Olympus, Samsung, Hyundai, Daewoo, Motorola, Nortel, and Yahoo. The complete list at LHSP's web site also includes names like Comverse, Aculab, McGraw-Hill, National SemiConducotr, Pika, Seiko, NeoTelecom, Delfi, Cellport, Clarion, etc. Recent wins rumored but unannounced are said to include Mobistar, Deutsche Telekom, France Telecom, and Alcatel.

Competitors
Dragon Systems, a private firm, Nuance Technologies, SpeechWorks, and IBM's ViaVoice are competitors.

Financial and Stock Information

Information on the speech technology industry is hard to come by -- one estimate claimed that 1999 saw speech technology make up a 700 million dollars, with LHSP raking in 340 million dollars that year. I've had difficulty making contact with the company on confirmation of percentages of the industry. However, most articles do refer to LHSP as the global leader.

LHSP's revenues in the last quarter were up 50% from same quarter last year. Gross margins are at 71% and operating margin is at 23%. EPS growth is 111% this year. Market cap is at 6.5 Billion.

Dictaphone's revenues last year were around 350 million dollars, or about the same as LHSP. LHSP bought Dictaphone with 15% of its market cap.

There is some talk that LHSP is going to create three different entities this year and spin them off, ala Palm.

GORILLA CHARACTERISTICS

Is there a discontinuous innovation or a proprietary open architecture
Yes. I believe that speech recognition is a classic discontinuous innovation -- replacing keyboard/screen interaction with a computer to speech/screen or speech/speech interaction is a radical shift. As the wireless revolution brings us computers everywhere and miniaturized on a variety of PDA and cell and anything-else-we-haven't-thought-of yet, speech recognition seems to be an essential part of that miniaturization. You can't fit a keyboard on a watch -- until brain-to-computer nexus is available, speech recognition will have to do.

Does it have the potential to grow into a mass market phenomenon, become a standard?
Yes. Speech recognition will become ubiquitous because it has to. Already, speech recognition in customer service phone technologies have "solved" the problem of two-hour waits getting thru to a customer service representative. With minituriazation, wireless, hands-off computing, etc, the next decade should be the decade of speech recognition. Carpal tunnel syndrome alone should assure it.

Are there high barriers to entry and high switching costs?
Aha, here is the catch. I've been trying to figure this one out, and was dispirited at first. As a "part" of the operating system, voice recognition doesn't seem to be a gorilla game. Someone I corresponded with compared it to the graphic card industry, and said he would never invest in that industry.

But there are particular parts of this game which may offer it extraordinarily high incentives to stay with the first mover. Voice recognition has been held back by how long it takes to learn, and how the computer has to "learn" your voice. Once you take the time to "teach" your software/computer/handheld device/embedded computer in your rug what your voice is like, what your mannerisms are, what you mean when you say this, etc, you won't want to change! Those are man-hours that you've spent teaching the damned thing, and if you switch to different software, you'll have to do the whole thing over. It's like that favorite pair of jeans or leather jacket -- they transform to fit your particular shape, and you can't buy anything on the rack that equals it. Pretty snazzy. As well, if LHSP is sharp they'll start building a databank of different individuals voices, allowing users anywhere to tap into their own database to speed voice recognition processes.

Have Value Chains developed, and have they crossed the chasm?
Yes and yes. Their list of partners is impressive -- MSFT, Intel (their technology is to be embedded in some of Intel's future chips), GTE -- check out http://www.lhs.com/partners/strategic/ for the entire list, which grows weekly. Their technology seems to finally be out of the chasm, good enough for mainstream usage. Their EPS growth of 100% may mean that they are entering the tornado. For now, they seem to be knocking very hard on the medical transcription bowling pin.

Summary and Analysis

LHSP is the dominant player in global speech recognitions, a technology which will be essential as we move into a one-world wireless market. Mobile commerce -- which will at some point eclipse plain old e-commerce -- depends on quick and effective speech recognition. LHSP is the first mover and the only real international player with experience in the automated translation of over 15 languages, including Chinese, Japanese, and Korean.

However, the determination of whether the industry will standardize around one company's products is a bit more difficult to answer. Since this is a rather new industry, it's not clear exactly what is going to happen when competing speech recognition softwares start bumping up against each other.

It may be wise in this situation to look to Europe, which seems to be ahead of us in wireless penetration and which has more inter-language questions. Apparently, last wek 5 contracts were signed for Mobile operators at the CeBit show -- MobiStar, France Telecom, and Deutch Telecom were three mentioned. As Europe becomes one marketplace, companies are going to have to figure out how to deal with a wireless market which speaks several languages. LHSP seems to be perfectly placed to grab this multi-language market -- and once users have trained the LHSP software to deal with his or her own vocal patterns, they are not likely to change. As well, companies who build software around LHSP are not likely to change -- speed counts.

With LHSP set to be included in MSFT Office, selling a Linux-compatible version, and embedded in Intel chips, LHSP might be at the very left side of an enormous S curve. It's very early in this game, but their particular game is one which with a fair amount of certainty we know will be necessary to the next stage of computerization, ubiquitous and lucrative.

RESOURCES


www.lhsl.com is a great place to learn about everything LHSP is into.

http://www.lhsl.com/news/ is a collection of press releases

http://www.lhsl.com/pressroom/inthenews/ is a collection of newspaper and magazine articles...

MSFT and LHSP
http://www.wugnet.com/wininfo/win2000/news/display.asp?ID=2580

mobile wireless commerce and LHSP
http://boards.fool.com/Message.asp?id=1170038000177000

A LHSP fan speaks
http://boards.fool.com/Message.asp?id=1170038000185000

Heard around town...
http://messages.yahoo.com/bbs?action=m&board=4687489&tid=lhspf&sid=4687489&mid=21324

The year is 2020 & This is Our World!! (very good post, should be made longer and stuffed with even more gorillas)
http://boards.fool.com/Message.asp?id=1170038000217000
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