Is Nuance L&H II?
Nuance Communications 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 LACE>. 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.
The furious acquisition pace made it virtually impossible to understand what was actually happening at L&H. This is the same for Nuance. The acquisitions serve as a cover for the “shell game” that Nuance is playing.
Some of the specific items that suggest that Nuance is heading for an L&H-type finale are:
· Top management dumping Nuance stock;
· No historical GAAP profits;
· No GAAP profit in sight;
· GM deterioration means that hemoraging will continue;
· Gross violation of FASB 131;
· Long-term Nuance CFO departing with no explanation and his $3M stock sale;
· New Nuance CFO comes from bankrupt/defunct company;
· Nuance gross margin continually declining;
· Nuance license revenue is collapsing;
· Unable to compete in market so Nuance attempts to compete in the courtroom;
· Nuance attempts to destroy innovation by suing competitors;
· Nuance investing in litigation rather than R&D;
· Acquisition targets refusing Nuance, even with huge premium;
· Nuance patent portfolio is mostly a fraud;
· The Nuance Move into outsourcing is high-risk;
· CEO comments about good partner relations suggest either ignorance or deceit
Wow, quite the analysis. I believe you're way off base. Did Ricci fire you or something?
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You should offer some facts to support your conclusion that you believe that I’m “way off base”. I’ve offered my facts and they present a compelling case for concluding that Nuance is heading for the same fate as that of Lernout & Hauspie who went bankrupt in 2000. I’ve never worked for Paul Ricci, so he certainly didn’t fire me. I’ve also never worked for a Nuance competitor.
As a consumer advocate, my motivation for doing this is to attempt to stop the predatory/monopolistic behavior of Nuance that is hurting the industry and consumer.
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Rather than a list of bullets, can you be a little more detailed? For example, you make the claim that "Acquisition targets refusing Nuance, even with huge premium" so I would ask which companies are refusing Nuance's huge premium deals? Also, Nuance is active in the courtroom, but the opposuite view is that Nuance is protecting its inevstments (according to you, it overpaid for its acquisitions, but doesn't it only make sense that it would try to protect the IP that it paid such a high price for?). How else does a company protect its IP if it doesn't take percieved infringers to court? I do think Nuance is overly aggressive with its lawsuits, but saying protecting ones IP is symptomatic of a house of cards is a stretch (just my opinion). Can you be more specific with your claim that they are in "gross violation of FASB 131"? If this were the case, teh SEC would be all over them and I am wondering why they are not. I'd love to see your deeper analysis of these claims. I'm not disputing what you are saying (although I do disagree with a lot of it), but I do want to share in the details of your analysis/claims. After all, you are saying that transparency is key, no? So, how about a litle transparency in your analysis. Thanks
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Sure – plenty of detail exists to support each of the items in the analysis. We will be presenting the details in the coming weeks. Voice Signal is an example of Nuance paying over 30x trailing revenue. Nuance 1st attempted to acquire Voice Signal. When Voice Signal rebuffed the Nuance offer, Nuance then turned around and sued Voice Signal for patent infringement. The patent had questionable validity and Voice Signal was not infringing. Nuance is not protecting their IP. They are suing simply to damage a smaller competitor that is beating them in the marketplace by being more innovative. This was the same thing that Nuance has recently done with vlingo. vlingo is whipping them in the marketplace because they have a superior technical approach. Since Nuance can’t compete in the marketplace, they attempt to win by dragging a tiny competitor into an expensive legal defense that is a diversion from the innovation that they have been doing and not something that a tiny company can afford. Aside from the fact that the patent has quite questionable validity and vlingo does not appear to be infringing, Nuance isn’t even using the patent in their own products. What Nuance is doing is engaging in anti-competitve behavior that violates the entire basis of the US patent system which is to encourage innovation and competition.
If you read FASB 131 and then study a Nuance financial report, it is totally apparent that Nuance is completely violating FASB 131. Your comment re ‘the SEC hasn’t gone after them so that must mean that they are innocent’ must be a joke. Given the track record of the SEC in being proactive in going after violations, I’ve got to believe that you weren’t being serious.
More detail on Nuance violating FASB 131 in the next note.
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Nuance Violating FASB 131
It is obvious that they have four distinctly different business areas that are each greater than 10% of the total business and they should be broken out separately. It is apparent that they have four (4) distinctly separate business units that have different products, distribution channels and customers. Any sort of reasonable assessment would suggest that Nuance manages the operations of these businesses separately and that the financial results for these individual businesses should be available. The gross violation of the FASB 131 guideline appears to be an attempt to avoid transparency and would suggest that Nuance has things to hide. I have been pounding on them for well over a four years on this and have never received even an attempt to rationalize why they are violating the FASB 131 guideline. The only reason that I can imagine is that, by not reporting the business units separately, they are able to more readily play financial shell games. Ricci will state that the embedded segment grew 34%, Enterprise was up 53%,…. and it is never quite certain what he means - yet they refuse to report as required by the FASB 131 guidelines.
Violating the reporting requirements of FASB 131 appears to simply be part of the Nuance strategy of avoiding transparency and openness.
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The activities of Nuance Communications bear a striking resemblance to what L&H was doing prior to imploding in early 2000.
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Nuance Communications Inc was being talked about, but in a good way. Its shares rose after an analyst upgraded the stock, due to improving growth prospects for its technology in the mobile phone and other markets. Broadpoint AmTech's Brad Whitt raised his recommendation to "buy,'' saying "Nuance is the clear market leader for speech recognition technology.'' He expects it to meet or exceed third quarter analysts' expectations for earnings of 25 cents per share.
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You should offer some facts to support your conclusion that you believe that I’m “way off base”. I’ve offered my facts and they present a compelling case for concluding that Nuance is heading for the same fate as that of Lernout & Hauspie who went bankrupt in 2000. I’ve never worked for Paul Ricci, so he certainly didn’t fire me. I’ve also never worked for a Nuance competitor.
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Nuance develops its own voice-recognition software and it said it would use Jott to expand its portfolio of mobile voice services. The company specifically said it would package Jott Assistant with its voicemail-to-text solution, along with other voice services, and offer the products together to mobile operators.
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A few of the more obvious similarities are 1) a highly aggressive M&A program that was attempting to eliminate competition and 2) constant distortion of reality by the corporate management.
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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.
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I would ask which companies are refusing Nuance's huge premium deals?
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The patent had questionable validity and Voice Signal was not infringing. Nuance is not protecting their IP. They are suing simply to damage a smaller competitor that is beating them in the marketplace by being more innovative
The only reason that I can imagine is that, by not reporting the business units separately, they are able to more readily play
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it overpaid for its acquisitions, but doesn't it only make sense that it would try to protect the IP that it paid such a high price for?). How else does acompany protect its IP if it doesn't take percieved infringers to court? I do think Nuance is overly aggressive with its lawsuits, but saying protecting ones IP is symptomatic of a house of cards is a stretch (just my opinion). Can you be more specific with your claim that they are in "gross violation of FASB 131"? If this were the case, teh SEC would be all over them and I am wondering why they are not. I'd love to see your deeper analysis of these claims. I'm not disputing what you are saying (although I do disagree with a lot of it), but I do want to share in the details of your analysis/claims.
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