Survivors of the Great Millennial Bubble Burst may recall the name of Lernout & Hauspie -- the Belgian wunderkind that was going to revolutionize how people, er, write things like this column. Through the magic of speech recognition software, we'd all be able to toss our mice and keyboards, and just, well, tell the computer what we were thinking, so to speak -- and watch the words appear on screen.
Lernout, sadly, is dead. But its technology lives on, in the form of ScanSoft (NASDAQ:SSFT), which bought the company's speech recognition business and, in particular, its trademark "Dragon Naturally Speaking" product. After initially struggling at turning a decent profit with this business, it looks like ScanSoft is finally hitting its stride. In its earnings report for the fiscal first quarter of 2005, released yesterday, ScanSoft announced sales growth of 29%, capped by a tripling of net profit from one penny per share, to three.
What's especially impressive about that profit growth is that ScanSoft achieved it despite the fact that the company paid taxes this year -- whereas last year it availed itself of a tax benefit to boost its profits. Impressive growth in the company's net margins, from 2.8% to 5.2%, helped, as well. While those are hardly the kind of margins you might hope to see from a software company, at the risk of mangling a metaphor: "Any improvement in a storm."
The report wasn't all good news, however. Accounts receivable grew much faster than even the strong sales growth: 39% vs. 29%, which suggests a low quality of earnings. And the company's failure to provide a cash flow statement makes working out its true cash earnings more difficult. When a company reveals two of the three standard statements on its financial doings, but hides the third, a Fool can't help but wonder if there's a reason for that.
Nonetheless, Wall Street was impressed with the two statements ScanSoft did reveal. To say the least. During the trading day Monday, ScanSoft shares climbed more than 3% despite an overall flat market. After the report was released, the shares leapt another 7%. As for whether the results deserved such an enthusiastic reception, we'll just have to wait for the 10-Q to be filed, cash flow statement and all, to decide on that.
Fool contributor Rich Smith has no position in either of the companies mentioned in this article.
