Break Down: Lernout & Hauspie Speech Products

Break Down August continues today with the company that finished second in the voting during this spring's Rule Breaker seminar: Lernout & Hauspie Speech Products (Nasdaq: LHSP). (Ballard Power, which we ran through the paces in June, finished first in the seminar.)

I wrote this report -- or, rather, spoke this report -- using L&H's voice recognition (VR) software Voice Xpress Advanced on a Pentium III/500 computer with 256Mb RAM. I had never used voice recognition software before. It proved to be much simpler than I had thought. After only about an hour of training, consisting of reading a few pre-programmed passages and feeding in a couple of writing samples, the software recognized my natural speech with about 90% accuracy.

Some of the tasks would have been easier by hand, but the recognition rate was pretty darn good. With some further training, I imagine I could get it up to the high 90s. I really want VR to work well, so that I can save all my wrist injuries for foosball.

VR software has come a long way in the last two years, partially because of improvements in the technology, but mostly because VR requires a great deal of processing power. The Pentium II brought the required level of performance to the desktop, a vital moment for L&H's Voice Xpress.

Still, VR is not L&H's whole story.

Top dog and first-mover in an important, emerging industry

L&H has products in several different areas. I break it down into four main groups, though they all can relate to one another: 1) voice recognition, 2) transcription, 3) text-to-speech, and 4) translation.

1. Voice recognition
In addition to developing its own VR product, L&H recently bought one of its biggest competitors, privately held Dragon Systems. Between Dragon's NaturallySpeaking (the latest version of which appeared last week) and L&H's Voice Xpress, L&H has the lead in VR products. The other serious competitor, IBM (NYSE: IBM) through its ViaVoice line, doesn't have nearly the focus on the industry that L&H has. As Fool writer Richard McCaffery says, IBM doesn't wake up in the morning thinking, "What's happening in our VR unit?"

VR presents a number of opportunities. First, the corporate world calls out for a workable product in this field. You've probably heard people complain of arm ailments from repetitive stress, if you haven't felt them yourself. I've had a number of people here at the Fool tell me that they want to hear how my software works out in order to decide whether they want to try it themselves.

The problem is that people expect a lot from VR. They want the Star Trek world, where you can simply command the computer to answer any problem you have. VR technology is not quite there, though I can attest that it has reached a comfortable "natural speech" level. The commands are simple and easily recognized with normal cadence. In another few years, it may well become a force in the personal computing world.

The second, and potentially much bigger, opportunity is in telephony. I'll talk more about this later.

2. Transcription
Though its recent acquisition of Dictaphone, L&H has about 60% market share in medical transcription, an estimated $6 billion market. Combined with the purchase last year of a speech-recognition company that specializes in processing speech recorded over the telephone, L&H plans to expand Dictaphone's service to include an outsourcing transcription service. Dictophone offers similar opportunities in the legal, insurance and even trading businesses.

3. Text-to-speech
This technology has been around for many years (remember the computer voice in WarGames -- "Shall we play a game?"), but it has only recently begun to take on the qualities of natural speech. L&H says that its RealSpeak product is almost indistinguishable from human speech.

The big application here is audio feedback from Web pages. Combined with speech recognition, RealSpeak can read content to a mobile phone user who issues commands to the browser. L&H has licensed RealSpeak to numerous voice portals and telephony companies, including 50 new contracts in the latest quarter. L&H is also working on a deal with Visteon (NYSE: VC) and Delphi Automotive (NYSE: DPH) to offer automotive voice controls and Internet speech portal services.

L&H is the main player in text-to-speech, but others offer wireless command-recognition products. Competition comes from Nuance Communications (Nasdaq: NUAN), which develops speech-based interfaces and voice verification for telephony applications. Many analysts see Nuance as the current market leader in this space, which its market cap, similar to L&H, reflects. Dain Rauscher Wessels doesn't even consider L&H a serious competitor. Nuance certainly has the jump here, but L&H is booking more and more clients. It clearly intends to compete. Newly public SpeechWorks (Nasdaq: SPWX) and Philips Electronics (NYSE: PHG) also offer competing products.

4. Translation
Anyone who has used Babelfish knows that automated translation hasn't been perfected yet. L&H offers iTranslator, both for gist-level translation and for incorporation in software development. It also has iTranslator Online, which combines automated and human translation to achieve better results.

The whole package -- is L&H top dog?
L&H leads in some of these fields and trails in others, but it is the only company that partakes in all of them. Allowing that each area will require further development (especially translation), the combination of all four could be powerful. Imagine a Japanese-speaker dialing up his Internet account from his car, requesting Microsoft's latest press release, and having it read to him in Japanese. That's one killer app. No language barriers, no need for mobile keyboards for your Palm Pilot, no need to occupy your hands. It's Star Trek, man.

Can it happen? That's the ultimate goal, and L&H is the first mover and top dog. There is plenty of potential revenue strewn on the path along the way.

That's only the first criterion, though. There are five more hurdles that L&H needs to clear to qualify as a Rule Breaker. I'll examine those points tomorrow.

Until then, let us hear what you think of L&H on the Rule Breaker Companies discussion board.

Fool on!
Brian Lund, for rent to parties and Bar Mitzvah as TMF Tardior.

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