wireless data: speaking upreplace more expensive, people-based call centers and tedious tone-tone...

February 1, 2001Technology Research

Wireless Data: Speaking UpSpeaking of the Next Killer Application, Voice Takes Center Stage

Source: Corbis Images.

Marianne R. Wolk 212.407.0427

Candace K. Bryan 212.610.6109

Table of Contents

SECTION I. INVESTMENT SUMMARYOverview..........................................................................................................................3Investment Thesis and Recommendations......................................................................4

SECTION II. THE VOICE MARKETVoice Solutions Market Likely to Reach at Least $5 Billion by 2005..............................11Diverse Markets for Voice Solutions..............................................................................12

Enterprise.................................................................................................................13Telecom ...................................................................................................................16Internet .....................................................................................................................17

Expanded Distribution Strategies Track the Evolution of Speech Applicationsand Markets ..................................................................................................................19Voice XML, an Emerging Standard for Application Development..................................22Onset of Standards Could Alter the Value Chain of the Voice Market...........................23

SECTION III. VOICE TECHNOLOGYVoice-Enabling Technologies, Speech Recognition at the Core ...................................29

SECTION IV. VOICE VENDORSNuance and SpeechWorks Enjoy Accelerating Growth and SignificantBarriers to Entry.............................................................................................................35Public Company Profiles ...............................................................................................37Private Company Profiles ..............................................................................................79

Robertson Stephens, Inc. 1

SECTION I. INVESTMENT SUMMARY


Overview

This report marks the fourth in our ongoing series exploring solutions and technologies that wefeel are critical to the success of the burgeoning wireless Internet market. Our focus at present isthe market for voice software and services (“voice market”), which includes speech recognitionengines (speech-to-text), speech synthesis (text-to-speech), speech interfaces (voice browsers),speaker verification, related applications and the slew of new voice portals1 and ApplicationService Providers (ASPs) hosting voice content and applications. Our thesis, explained in moredetail in the following section, is that voice is the killer application for the wireless Internet. Byproviding the most user-friendly data interface possible to telephony users, voice technologyexpands the potential Internet market by 3–4 times and acts as a major catalyst for wirelessInternet information access and mobile commerce.

We have divided this report into three major sections: the voice market, voice technology and voicevendors.

Our discussion of the voice market addresses the following:

• our forecast for growth

• enterprise, telco and Internet market opportunities and business models

• the mutual benefits of voice and wireless data

• the transition in distribution strategies as the industry moves from equipment-centric toapplication-centric sales

• the effect of open standards, such as VoiceXML, on the value chain in the voice marketand the relative positioning of leading vendors in an open marketplace

Our review of voice technology includes:

• detailed descriptions of the components of voice market technology

• investment in natural language understanding, interruption capabilities and interfacetechnolgies

Our final section identifies public and private vendors that we believe are positioned for success inthe voice technology market.

Other reports in our series include:

Wireless Data: The Next Internet Frontier (dated January 25, 2000)

Wireless Data: The New Economics (dated June 5, 2000)

Wireless Data: In Sync (dated December 28, 2000)

1Please refer to Robertson Stephens retail research by Lauren Levitan for more informationregarding branded voice portals and voice commerce.

Robertson Stephens, Inc.4

The Human Side of Computing: Voice Is at the Cusp of a Major InvestmentCycle, Widening the Promise of the Wireless Internet

In our opinion, voice is the next killer application, poised at the start of a major new technologyinvestment cycle. Though speech technology is not new, we believe vast improvements in theaccuracy and performance of speech recognition engines coupled with the skyrocketing growth ofInternet and wireless communications is setting the stage for widespread adoption. In our view,voice is the most natural user-friendly interface for data and likley to act as a major catalyst fortelephony-based Internet services. In particular, we believe voice is the killer application for thewireless Internet, handicapped currently by small screens and inadequate data input devices. Thosecaught pressing 999-2-44-666-666 into a touch-tone dialing system to spell “Yahoo” or clumsilyusing your thumbs to type a simple sentence on a two-inch keyboard should appreciate the vastimprovement offered by voice. Major improvements in voice technology, including broader supportfor complex vocabularies, languages, accents noise, natural language (uh-huh) and performanceabove the 90% mark, voice solutions are no longer just a dream. Buoyed by a potential base of onebillion wireless users seeking Internet access by 2002, approximately 4x today’s keyboard-centricPC Internet users, the voice market is at the cusp of a major investment cycle, which we alreadymeasure at approximately $1 billion.

Accuracy and usability are improving speech’s usefulness in mainstream settings. Speech-to-texttechnology has been available since the early 1980s but its popularity has seen a major step forwardover the few years as its efficacy has risen. At present, companies like SpeechWorksa, PhilipsSpeech Processing and Nuance Communicationsa offer speech recognition (speech-to-text)technology featuring dramatic improvements in accuracy. According to Forrester Research, thecombination of increasingly sophisticated algorithms, richer vocabularies and increased cost-effective processor power has produced 90%-plus accuracy across multiple tonalities, languages,accents and speaking rates (although it still falls short of the 99.9999% accuracy of live telephoneaccess). Newer speech recognition systems also feature interruption (barge-in), natural language(open-ended conversation) and noise reduction and filtering mechansims—some of the “missinglinks” that drove accuracy below 50% in earlier versions (at least one miss per sentence uttered). Inaddition, new compressor/decompressor (codec) software has reduced bandwidth requirements. Asa result, these solutions are now far more effective for mainstream use in a host of settings—indoor,outdoor, wired and wireless. This vast improvement in accuracy is evidenced by customerpurchasing criteria, which short lists the aforementioned vendors based on accuracy and thenquickly turns to factors ranging from computing requirements and vendor to applications, service andtime to market.

From dial-tone to voice-tone, voice is revolutionizing the way telephone networks are used. Withadvanced speech recognition, voice-directed dialing is becoming a reality. Enterprises and carriersalike have already deployed simple applications for tasks such as voice-directed call routing. Theseapplications often replace legacy touch-tone systems that required the calling party to “spell” thename of the person they sought (e.g., press 5,6,3,7,6,4,8,4 for Joe Smith). Newer applications arefar more responsive, allowing systems to recognize spoken phrases such as “Call Joe,” and thenprobe further to see if the user wants to “Call Joe Smith or Joe Green” and then may even ask if youwant to call him “at home, mobile or office” before routing the call to the selected number. Lookinginto our crystal ball, we believe the real nirvana for the voice market is “voice tone”—where, muchlike in the days of old, a user attempting to make a call hears a voice saying “how can I help you”instead of a mechanical dial tone—only this time the voice will be that of a 24/7 advanced speechrecognition system instead of a busy live operator.

Speaking to customer service takes on a whole new meaning. The emerging voice market shouldsee a sizable near-term growth opportunity in voice-enabled customer service (a call centerupgrade) and eCRM applications. Much of the current market for speech recognition systems has


been driven by enterprises and communication service providers as they seek to automate andreplace more expensive, people-based call centers and tedious tone-tone systems. Call center costscan be reduced by as much as 90% relative to a live customer service representative (CSR)assuming a call to a customer service representative (CSR) runs $1.00–1.50 per call and only $0.09for a speech recognition port. In addition, to reduced expenses, voice-based systems improvecustomer acquisition, retention and loyalty by improving hold times and faster destination access.SpeechTechnology indicates surveys find more than 80% of consumers using speech systems aresatisfied and two-thirds indicate such systems are better than live customer service because they are:

• consistent with messages

• more controllable and analyzable than call center personnel

• more convenient than call centers as availability is 24/7.

• less tedious than touch-tone (dual-tone, multi-frequency systems or DTMF), which has aseeminglessly endless number of multiple-choice questions and abandon rates of 60%.

• more friendly to navigate, featuring natural language rather than pre-recorded and finiteoptions.

Calling the Internet just got simpler. Everyone knows how to give voice commands, makingeverything from dialing, to browsing the Internet, to requesting directions or sport scores mucheasier. Thus, the advances of voice technology coupled with widespread Internet use (250 millionworldwide users forecast to reach at least 600 million by 2003 by IDC) has led to the firstimplementations of the voice Web. New voice-based information services and voice portals such asQuack/AOL, Tellme, BeVocal, HeyAnita, Talk2.com and Audiopoint are now 30–50 strong accordingto the Kelsey Group. Advertising supported and fee-based voice services offer telephony-basedaccess to the same information available to keyboard-centric PC-based Internet users—weather,directions, stocks or sports. Davidson Consulting predicts that more than 2 billion people will useInternet voice portal, voice-enabled Web sites and Web base interactive voice response (IVR)systems by 2005.

The true convergence of voice and data—Voice is a major catalyst for the wireless data market…With approximately 75% of today’s wireless carriers having made provisions for wireless dataservices, we believe wireless data has finally become a reality. We estimate that 5% of theapproximately 600 million worldwide wireless subscribers access the Internet from their wirelessphones in 2000 and project that figure could climb to 40–50% of the projected 1.2 billion wirelesssubscribers doing so by 2003. To date, the proliferation of wireless data has been hampered bymany factors, including poor bandwidth, handset availability and a lack of compelling applications.We expect most of these issues to resolve themselves in 2001, as bandwidth and handsetavailability should improve significantly with GPRS introductions in Europe, 3G introductions inJapan and at least 100 million Internet-enabled handsets shipped (Gartner). The final factor—compelling applications—should improve as billions of dollars invested in wireless Internet contentand applications comes to market. Amidst this backdrop, we view voice as the killer application totake wireless data use from short-messages, e-mail or the occasional game to a daily habit. Voicealleviates the difficult navigation caused by small screen sizes and the shortfalls of today’scumbersome input devices (touch-tone, mini-keyboard or stylus). With a natural human voice interface,users will be able to quickly and easily cruise the Internet by simply telling the browser where to go,purchase items securely with voice authentication and listen to e-mail, instant messages and other textmessages with text-to-speech. Moreover, Internet penetrations may finally broaden beyond thecomputer-literacy rate (an installed base of more than 450 million PC users worldwide) to include thelarger universe of 600 million wireless and 1 billion wireline phones globally.


…and a beneficiary and benefactor of carriers’ WAP offerings. We expect voice-enablingtechnologies to coexist with wireless data platforms used by mobile subscribers. In some instances,the small screen of a wireless device (such as a cell phone or PDA) can be a major deterrent to datautilization. In these cases, we believe voice will be the preferred interface. In other instances, voice willbe a less compelling interface than a keyboard or stylus for mobile subscribers. When users’ choicesare numerous (>5–10 options), it is easier to visualize menus than remember them and a keyboard orstylus is a superior interface. Moreover, instant messaging and e-mail were designed to be “silent”conveyers of information and are far more appropriate than voice while the user is attending a meeting.In our view, the lion’s share of wireless users are likely to opt for multi-modal interfaces where speech-to-text (“recognition”) and text-to-speech options are used in conjunction with wireless datasolutions. For example, a driver seeking directions may wish to request them vocally, but prefer toreceive them as text or, better yet, a graphical map. To that end, drivers and in-vehicle data access isa compelling market for hands-free voice interfaces to the Internet. With estimates that 70% of allwireless calls being made while driving (by GM and ABI), there have been several initiatives by localauthorities to ban in-vehicle wireless use (35 states have considered such bills since 1995) and theU.S. Department of Transportation has said it will add stricter guidelines as well.

Voice opens a whole new avenue for commerce, be it mobile or fixed. Voice opens a whole newrealm of possibilities from Voice Commerce (vCommerce) by wireless and wired telephony users toMobile Commerce (voice-in, data-back, mCommerce). Using a telephone and a voice browser (aserver-based user-interface requiring no change to the telephone), a caller can ask for a trainschedule for Monday from New York City to Philadelphia and receive a human-like response askingthe caller if they would like to purchase a ticket. The same features are already available for movietickets (try AOL’s voice portal, the owner of MovieFone) or stock purchases (via eTradea,b, Schwaband Fidleity). According to ABI, the global market for vCommerce should expand from $2.3 billion in2001, expanding to $4.7 billion by 2002 and topping $50 billion by 2005.

Deployments in full swing: speech is happening now at many enterprises… We believe 2001 will bea significant growth year for voice-enabled applications, as these user-friendly solutions are adoptedby new enterprises, service providers and Internet customers, and existing users proliferate newrevenue-generating and cost-saving applications througout their organizations. In the enterprisemarket, Fortune 1,000 companies, including American Airlines, Federal Express, Fidelity, MerrillLynch, United Airlines and UPS, are currently using speech to improve customer satisfacation andloyalty and to reduce costs. We expect these deployments to accelerate as application developmenttimes are cut by the introduction of packaged software (such as the dialog modules offered byNuance and SpeechWorks) and the body of trained developers and systems integrator explodeswith the emergence of XML-based standards. Voice applications currently being used are:

• account access for stock portfolios, 401(k) accounts, et cetera.

• customer service, on an instant 24/7 basis

• voice-activated dialing

• travel and concierge services (check airplane schedules, ticket availability, etc.)

• technical help, with computer and telephony problems

• schedule appointments

• obtain price quotes

• fill re-orders• track supplies


…and the race has begun to win the voice Web. We see a race by established Internet players suchas AOL, Lycos and Yahoo!a to voice-enable their services as they strive to keep pace with the effortsof new entrants offering pure-play services (BeVocal, HeyAnita, Tellme) and the onset of wirelessvoice portal services from AT&T Wireless, Bell South and others offer wireless carriers and voiceportals more opportunities for network utilization, customer retention, higher minutes of use andincreased revenue generation. Allied Business Intelligence (ABI) predicts at least 71 million voiceportal users in North America by 2005 up from 4.4 million users in 2001, with a concurrent shift fromwireline (75% in 2001) voice portal usage to wireless (75% of users by 2005) usage. The challengeis to create compelling applications and information sites supporting voice access, moving from basicoptions sites (horoscopes, shopping, sports, weather, calendar/appointments, e-mail, news, traffic anddirections) to a typical portal’s 100-plus links. The advent of VoiceXML, an emerging standard thatenables voice portals to hyperlink users to other voice sites (and then return them back again), shouldmean voice-enabled Internet content will flourish over the next several years, in our opinion.

The voice market is likely to reach $5–10 billion by 2005. Our top-down and bottom-up analyses ofthe voice market suggests it approaches a $1 billion market at present, spurred by voice-enablingtechnology (such as speech recognition), applications (such as call routing or customer service) andservices (portal, hosting and systems integration). Our thesis is that vast improvements in voicetechnology and the widespread adoption of wireless and Internet services will lead to broad-basedadoptions of voice soltuions over the next several years. In addition, the onset of standards such asVoiceXML (vXML) should lead to exponential increaes in voice-enabled Internet sites and voiceapplications. Together, these trends should mean the voice market could grow more than 80%annually to at least $5–10 billion by 2005, in our view.

As the voice market expands beyond the call center, vendor distribution strategies move fromequipment- to application-centric models (typical of an emerging market gaining solid footing). As thevoice market expands, it moves outside the influence of equipment vendors (VRUs) with entrenchedpositions within call centers. When the voice market was more narrowly defined as a call centerreplacement market, speech vendors were almost entirely tied to voice equipment vendors (VRU)because of their pre-existing relationship within the call center. Currently, the voice market hasexpanded to encompass a wider range of applications within enterprises, carriers and Internetvendors, shifting purchase decisions to the performance of the recognition engine, time to marketand the range, usability and availability of voice applications. Thus, along with a fivefold expansion ofthe voice market over the last few years, there has been a shift away from embedded applicationstied to a VRU vendor’s proprietary application development efforts. Instead, custom and pre-packaged applications designed by voice technology vendors, third-party packaged applicationdevelopers and custom systems developers currently flourish. Tracking these trends, leadingtechnology vendors such as Nuance and SpeechWorks, have developed and marketed their ownapplications and turned to the Big 5 consultants for third-party development and integration support.

VoiceXML should be a major catalyst for voice market growth… VoiceXML is an emerging standardfor voice application development backed by Motorola, Nokia, Ciscoa, Lucent, IBM, AT&T, Philipsand the World Wide Web Consortium (W3C). Because vXML is based on standard extensiblemarkup language (XML), it should broaden the voice development community well beyond today’sbase and accelerate the proliferation of voice applications. We also view vXML as a major positivefor Web portals and other Internet information providers because it should provide them a way toexpand the reach of their content/services from the 250 million global PC-Internet users to the largeruniverse of telephony access devices—both wireless and wireline, 1.6 billion in 2000. Thoughportals and application developers such as BeVocal, SpeechWorks and TellMe have adopted vXML,the vast majority of applications and Web pages at present (fewer than 1%) do not yet support theemerging vXML standard.


…stressing the performance and usability of the voice user interface, where Nuance andSpeechworks excel. VoiceXML uncouples the voice application from the voice-processingtechnology (i.e., speech-recogntion technology and equipment). In this open environment,performance advanatages (i.e., the 97–98% satisfaction with Nuance and SpeechWorks’ recongitionengines), and close ties to application and professional services organizations will become just ascritical to a voice technology vendor’s success as VRU vendor realtionships were in the past. Moreimportant, the key to acceptance of voice applications has always been a user-friendly, effectiveuser interface, where Nuance and SpeechWorks excel. Regardless of who designs and deploysvoice applications (or provides the speech recognition engine), this remains true. These vendors,already marketing Nuance Voyager and SpeechWorks’ VoiceXML Browser (via its Open WebInitiative), have a strong advantage in the interface market. First, they have multiple years ofexperience in developing effective user-friendly interfaces—no small task. Second, users are alreadyaccustomed to these interfaces via hundreds of applications deployed throughout financial service,travel, manufacturing and distribution, and Internet industires. Thus, we believe Nuance andSpeechWorks, leaders in the voice technology market, will dominate the market for voice interfaces.

We recommend investment in the shares of technology infrastruture vendors Nuance andSpeechWorks, positioned for accelerating growth backed by solid barriers to entry. We believeNuance and SpeechWorks (along with Philips Speech Processing, a subsidiary of PhilipsElectronics) dominate the fragmented market for voice infrastructure technology (i.e., speechrecogntion, text-to-speech and speaker verfication) where barreirs to entry are high. Although we doexpect at least one other vXML-compliant speech-recognition to hit the market over the next 12–18months, we believe Nuance and SpeechWorks will maintain their leadership positions. Advancedtelephony-oriented speech recogntion engines include a self-learning feature that ensures thesevendors realize exponential returns to their growth. In essence, the more the recogntion engine isused, the smarter it gets because the statistical algorithms in their solutions have more examples tochoose from. Thus, the performance gap widens for potential new entrants with each sale of thesevendors’ products. In addition to maintaining robust and differentiated speech-recognition engines,we believe speech-technology vendors, such as Nuance and SpeechWorks, will move up the valuechain. Already offering robust user interfaces in combination with speech recognition, we expectthese vendors to supplement these offerings with application development and deploymentexpertise. With hundreds of blue-chip deployments by all of these vendors, we believe bothperformance, references and experience on are on their side.

We also believe several private voice application providers and portals are well worth watching. Asdetailed in Section IV of our report, we believe several companies are well postioned at this earlystage of the voice market. These include:

• BeVocal • Telera

• Conversay • Tellme

• Etrieve • uReach.com

• Gold Systems • VerbalTek

• Hey Anita • VoiceGenie

• Indicast • Voxeo

• Interactive Telesis • Wavemakers

• Phonetic Systems • Webley Systems

• Talk2 • Webversa


SECTION II. THE VOICE MARKET


Voice Solutions Market Likely to Reach at Least $5 Billion by 2005

The market for voice solutions including infrastructure technology (i.e., speech recognition),applications (i.e., call routing, customer service) and services (i.e., voice portals) is currentlyestimated at approximately $1 billion and forecast to reach $5–10 billion worldwide by 2005. Themarket as we describe it addresses speech solutions for telephony users.

Figure 1: VOICE MARKET’S TARGET IS THE GLOBAL UNIVERSE OF TELEPHONY DEVICES(in millions, except for Voice $/Device data)

1998 1999 2000 2001E 2002E 2003E

AverageGrowth00–03E

Worldwide Population 5,935.5 6,003.4 6,071.9 6,141.7 6,212.4 6,284.1 1%Wireline Penetration 14% 16% 17% 19% 20% 22%Wireless Penetration 5% 7% 10% 13% 16% 19%

Wireline (Access Lines) 840.8 931.9 1,039.4 1,139.7 1,244.2 1,361.8 9%Wireless (Subscribers) 303.5 426.8 600.0 825.0 1,000.0 1,200.0 26%

Total Telephony Information Access Devices 1,144.3 1,358.7 1,639.4 1,964.7 2,244.2 2,561.8 16%

Voice $/Device $0.13 $0.22 $0.46 $0.76 $1.34 $1.95 62%Voice Market $150 $300 $750 $1,500 $3,000 $5,000 88%

Source: Data Monitor, IDC, Kelsey Group and Robertson Stephens estimates.

A Couple of Notes on These Forecasts.We have seen a wide disparity among industry sources as to the market opportunity for voicesolutions. Data Monitor points to infrastructure alone as a $1.2 billion market by 2004, a far cry fromthe $11 billion infrastructure software projection by the Kelsey Group by 2005. Either infrastructureforecast may be broadened to include a wide array of voice applications, implementation andsubscription services, as described in great detail in the following section of this report. CustomerRelationship Management (CRM) applications, a target market of voice vendors, is projected toreach $10 billion by some, $45 billion by others, while the market for voice portals is projected toreach $5 billion—both by 2005. ABI projects the vCommerce market, including transactions via voiceportals (voice-only such as HeyAnita and Tellme and voice-enabled such as AOL and Yahoo!), toreach $50 billion in the same time frame.

Our own analysis reflects a top-down and bottom-up effort at sizing the voice market, inclusive ofinfrastructure technology like speech recognition, applications and services.

• Our top-down forecast looks at the voice market relative to the installed market of voice-enabled telephony devices. We admit this analysis is somewhat flawed. Voice technologysales are driven by ports, not end-user devices, which rise and fall with the number ofapplications used per subscriber and the number of simultaneous users of these voiceapplications. For example, one port may support 200–300 subscribers for voice dialing butonce additional solutions are deployed—such as a voice browser—capacity could bereduced tenfold to just 20–30 subscribers per port depending on subscriber usage patterns(i.e., browsing to one Web site or 10, 100 or 1,000 simultaneous users). Projections for thevoice portal market vary greatly with the forecasters’ outlook for voice advertising andvCommerce, subscription or retail dollars created by voice portals. We believe a variety of


business models will emerge over time, both subscriber and usage-based, as voiceapplications proliferate enterprise, carrier and Internet markets.

• We supplement our top-down analysis with a bottom-up approach, reflecting the currentoperations of the players we have identified in the voice technology (speech recognition,speech synthesis, speaker verification), voice applications, voice services (hosting andimplementation) and voice portal markets. Combined, we find a range of $500 million–1 billion in revenues for 2000.

Diverse Markets for Voice Solutions—Telco, Enterprise and Internet

Generally, voice technology and applications are sold into three major market sectors: Telco,Enterprise and Internet. We estimate that the most prominent market to date is the enterprisemarket, accounting for approximately 50% of revenues to date. Telco demand is presentlyaccelerating and is likely to contribute approximately as much revenue as enterprise over the nextyear or two. We view the Internet, including voice portals and vCommerce as an emerging high-growth opportunity likely to see an increasing strength longer term.

Figure 2: MARKET OPPORTUNITY FOR VOICE SOLUTIONS

Voice Telephony Applications Enterprise Carrier Internet

Call Management Call Routing Call Routing

Call Answering Call CenterReplacement

Operator and CallCenter Replacement

Call CenterReplacement

Call Inquiries CRMvCommerce

CRMmCommerce

CRMmCommerce,

Voice Portals andvCommerce

Market Share 40–60% 25–30% 15–30%

Source: Robertson Stephens.


Enterprises Are the Lion’s Share of Today’s Voice Market

Enterprises have traditionally been one of the biggest consumers of speech-recognition technology,voice applications and services, encompassing 40–60% of most vendors’ revenues. Enterpriseshave primarily utilized these solutions to deploy voice-enabled customer support applications,replacing expensive labor-intensive call centers with less expensive automated solutions. Additionaldeployments have often centered around call management applications, which route calls based ona spoken request for an employee’s name rather than by spelling the name on a touch-tone systemor asking a live operator to transfer the call.

As enterprises continue to pour money into customer relationship management (CRM) applications,we believe they will increasingly turn to voice applications for cost savings. In 1999 alone, customersupport and call center application spending total $1.3 billion, representing approximately 2.5% oftotal enterprise application spending. IDC forecasts growth of at least 60% annually to $11 billion by2003. This is a subset of the overall CRM market forecast to grow 30% to $45 billion by 2003. Giventhe extent of their customer support requirements, accelerating as competition and new technologieslike the Internet reduce loyalty, we believe enterprises will be motivated to increase customersatisfaction and operating efficiencies. Voice-based natural language CRM systems improve time tomarket and ease information access relative to complex touch-tone menus or operator-basedsystems (not generally available 24/7). In addition, speech-enabled call routing is more efficient indirecting the call to the right department and is a more manageable way to minimize service time forcustomer service centers. Thus, organizations may turn to these voice applications and away fromcall centers to improve customer satisfaction and their return on investment.

Our analysis suggests voice-enabled applications accomplish both feats—improved cost efficiencyand customer satisfaction. Speech recognition systems have been found to reduce call center costsby as much as 80–90% by replacing expensive agent-assisted calls with automated systems. Agent-supported calls could cost $1.00–15.00 each, while a voice activated customer service call can costas little as $0.10 to $0.85. The cost reduction with speech recognition is achieved through theelimination of expensive personnel, more efficient handlings of calls, lower overhead costs and lowerper call costs. Our own analysis demonstrates an average per call savings of $0.86 over a four-yearperiod, with an agent assisting call averaging $0.95 and a speech-enabled call averaging only $0.09.In Figure 3, we compare agent- versus voice-enabled costs assuming an average call length of threeminutes for both. The calls per year are based on a 50-week year for agent calls (assumesholidays/vacation/sick time) and a 52-week year for speech-enabled calls. Annual costs for agentsare based on salary and training costs (no additional fees are considered for benefits or overheadper agent), with annual cost of living assumptions of 3% starting from an initial salary of $30,000 andflat training assumptions of $1,000 per annum. First-year costs for speech-enabled calls include aservice and equipment component ($6,250 equipment/$1,390 service), while additional yearsassume only service costs.


Figure 3: ANNUAL COSTS OF CALL CENTER CALLS—AGENT VERSUS PORT

Agent CallSpeech-Enabled Call

(per port)

Three-Minute Calls Handled per Year 34,000 32,000

Year-One Cost $31,000 $7,639Cost per Call in Year One $0.91 $0.24

Year-Two Cost $31,900 $1,389Cost per Call in Year Two $0.94 $0.04

Year-Three Cost $32,827 $1,389Cost per Call in Year Three $0.97 $0.04

Year-Four Cost $33, 782 $1,389Cost per Call in Year Four $0.99 $0.04

Average per Call Cost over Four Years $0.95 $0.09

Source: Robertson Stephens estimates.

The strongest early enterprise adopters of voice-enabling technologies have been financial servicecompanies. Initial deployments tend to begin in one business segment or department (like abrokerage help-line) and then spread to other parts of the business (a voice directory for employees,access to certain corporate applications, etc.). Evidence of this can be seen at United Airlines, whichlaunched a speech recognition system for employee flight requests in 1997 in order to refocusreservationists’ time from 1.5 million employee calls per year to external customer requests. With asuccess rate more than 70% of the employee base and substantial cost savings to the company,United expanded its speech recognition to external customer applications including flightarrival/departure information. Thus, speech technology vendors see strong growth from existingcustomers (upward of 50%) from increased usage of current applications (which drives new portsales) and new application sales. We believe enterprise customers demonstrate fairly linear buyingpatterns with new purchases often made on a quarterly or biannual basis.

We believe the most common pricing model for enterprises (and carriers) is a per-port pricingstructure. Voice vendors are able to leverage this model as customers demand richer content and/orapplications. Richer applications require more bandwidth, reducing the capacity of each port. Forinstance, if one port could support 200–300 subscribers for stand-alone voice dialing, then theaddition of another application, such as voice browsing, could reduce capacity to 20–30 subs perport. Although pricing varies across the industry, we estimate the per-port price for the voicetechnology software falls between $500–800. We believe the market is currently at a stage wherefewer applications are present, requiring smaller port purchases, but as the industry develops andapplications become more readily available, the per-port capacity restraint should result in largerlicense sales to voice technology and application vendors, in our view. Across all industry segments,new customers orders for voice technology tend to be approximately 100 ports at present ($60,000–70,000), while repeat orders can be substantially larger in the range of 320–370 ports (or $220,000),for an overall average deal size of $100,000–200,000.

Figure 4 outlines some key enterprise customer wins for Nuance, SpeechWorks and Philips.


Figure 4: ENTERPRISE VOTES ARE SPLIT BETWEEN NUANCE AND SPEECHWORKS

Vendor Customer Partner ApplicationFinancial ServicesNuance Charles Schwab NA Voice-recognition retail brokerage services and

user voice authenticationFidelity Voice-activated brokerage transactions

SpeechWorks eTrade NA Speech-enabled transaction servicesTD Waterhouse (Australia) NA Speech-activated quote system

Philips American Express NA Voice activation of credit cardsAetna Life Insurance NA Speech-enabled claims processing

Transportation:Nuance American Airlines Periphonics/Nortel Speech-enabled flight information, and frequent

flyer program access and upgrade requests

SpeechWorks United AirlinesContinental Airlines

NA Speech-enabled flight information and employeereservation

Philips Swedish Railways NA Speech-enabled train informationOther:Nuance Home Shopping Network Edify Speaker verification system

UPS NA Nationwide, voice activate, automated packagetracking system

Ernst & Young Lyrix Voice portal

SpeechWorks Federal Express Nextlink Interactive Speech-enabled customer service

Philips Premiere World(Germany/Austria)

NA Voice-enabled pay-per-view

Jaxx Lottery Phone(Germany)

NA Speech-enabled lottery game

Source: Company reports.


Telecom—A Major Opportunity for Voice Solutions

In our view, the telecommunications carrier market is the fastest growing for voice vendors andshould surpass enterprises for total spending sometime in the next 3–5 years. We believe thisexplosion is being fueled in great part by wireless carriers that continue to seek new sources ofsubscriber revenue and greater customer retention. Voice solutions allow carriers to offer severalbenefits to end users, including voice-activated dialing, spoken access to e-mail and, perhaps mostnotably, they allow carriers to create voice portals for easier information access on wireless deviceshandicapped by small screens and tiny keyboards. The deployment of these services are aimed atencouraging greater minutes-of-use (MOU) and new revenue-generating services. At the same time,a differentiated service offering featuring richer applications and superior ease of use is expected tobuild customer retention.

How does voice-enabling technology work with wireless data platforms deployed by carriers? Weexpect voice-enabling technologies to coexist with wireless data platforms used by mobilesubscribers. In some instances, the small screen of a wireless device (such as a cell phone or PDA)can be a major deterrent to data utilization. In these cases, we believe voice will be the preferredinterface. Alternatively, we envision speech engines used in conjunction with wireless data solutions.For example, a driver seeking directions may wish to request them vocally, but prefer to receive themas text or, better, as a graphical map. Other mobile applications may be more suitable without voice,such as those that require users to choose among more than 5–6 options. When choices arenumerous (>5–10 options), it is easier to visualize menus than to remember them. Moreover, instantmessaging and e-mail were designed to be “silent” conveyers of information and are far moreappropriate than voice while the user is attending a meeting.

We believe a variety of business models will emerge as carriers deploy a rich portfolio of voiceservices. At present, carrier deployments, like enterprise voice application and technology sales,track port deployments. While some of these services are provided essentially free to the end user,others—such as voice portal information services—should enable carriers to charge monthlysubscription fees, advertising revenues or collect vCommerce fees similar to the transaction fee orrevenue sharing models currently on the Internet. We believe several voice technology vendors havealready begun to form revenue sharing models to benefit from voice portal trends.

Figure 5: CARRIERS ARE INCREASING THEIR USAGE OF VOICE TECHNOLOGY

Voice Infrastructure Provider Customer ApplicationNuance Telus Voice interface to conventional IVR

applications and Internet contentSprint PCS Voice dialing

SpeechWorks BellSouthMCI WorldComa

Voice portalNA

Philips AT&T Wireless Voice dialingBritish Telecom Voice-enabled Directory AssistanceOmnitel Voice portalPortugal Telecom Voice-enabled collect calling



Voice Portals—Stand-Alone and Traditional Internet Adaptations

We see the Internet as an emerging high-growth opportunity for voice technology and applications.Voice technologies offer Internet portals an effective way to provide end users all the informationavailable to them at a desktop via any wired or wireless phone, a three- to fourfold increase ininformation access devices.

To generate new revenues, Internet companies can improve the breadth of their product offering byexpanding beyond eCommerce and mCommerce to vCommerce. We believe eCommerce comesfull circle with voice, finally allowing consumers to order products or buy new services via anyphone—wired or wireless—anytime, anywhere. An example of vCommerce is depicted by a useropting to call Amazon.coma and place a secure order from their home phone (secured by speakerverification), eliminating the need to boot their computer and dial into the Internet. Alternatively, auser may wish to use their cellular phone to check on the status of an order while they arecommuting home from work. The combination of security via voice authentication and the ease ofuse should stimulate the growth of vCommerce in the traditional eCommerce user base andintroduce non-traditional commerce into a new market segment. The worldwide market forvCommerce is expected to more than double in the next two years to $4.7 billion in 2002 andexploding to more than $50 billion by 2005 from $2.3 billion in 2001 as voice technologies penetratecarriers and portals (ABI). Growth should be bolstered by the congruent growth in voice sites, whichcurrently total approximately 500 but are projected to grow 100–200% annually (ABI).

In addition to new revenue opportunities (from the convenience and user-friendliness of voiceinformation access associated with voice portals), Internet companies are likely to deploy speechapplications within their customer service centers to reduce operating costs and improve customerloyalty. We believe Internet companies are trying to stay ahead of their “mortar” competition byoffering customers greater convenience and pricing—both fostered by voice technologies.

We believe voice infrastructure pricing to portals is initially tracking the models utilized by carriersand enterprises—priced generally on a per-port basis. Several vendors, such as SpeechWorks in itscontract with AOL, have also formed revenue-sharing agreements with portals to supplement portfees with usage-based revenues. In turn, we believe traditional Internet portals will offer voiceservices to consumers for either a nominal monthly subscription or per-use fee. For instance, the“AOL by Phone” offering is currently free for all users, but beginning in Feb 2001 there will be a flatmonthly charge of $4.95. Alternatively, pure-play voice portals currently are typically free toconsumers with revenues derived from advertising—though we do not believe this is sustainable.

Figure 6 outlines the current Internet customer overview for Nuance, SpeechWorks and Philips.


Figure 6: INTERNET CUSTOMER OVERVIEW

Vendor Internet Partner ServiceNuance Lycos Mobilee Voice Portal

ShopTalk TellMe Voice commerce platform for shoppingTellMe NA Voice portalBeVocal NA Strategic marketing and development agreement for voice-

driven content and services

SpeechWorks AOL None Voice PortalYahoo! NA Enable users to have Yahoo! mail read to them over the

phoneHeyAnita NA Voice Portal

Philips AOL Bertelsmann NA Automated caller ID and pre-qualification for customer care

talkingweb(Germany)

NA Voice-enabled Web browsing

Source: Company report.


Expanded Distribution Strategies Track the Evolution of SpeechApplications and Markets

In a burgeoning industry like voice, third-party distribution channels are instrumental in ensuringsales. To date, we believe approximately 30–40% of voice solution sales are driven by third-partydistribution, predominantly equipment OEMs and VARs.

Voice Response Unit Vendors—A Savvy Distribution Strategy at the Forefront ofthe Voice MarketVendors of core speech recognition engines, such as SpeechWorks and Nuance, benefited early onby aligning with leading voice response unit (VRU) vendors such as InterVoice-Brite and Periphonics(Nortel). These relationships gave SpeechWorks and Nuance a leg up in the call center replacementmarket, by leveraging the pre-existing relationships of VRU vendors, like these, with call centeroperators. VRUs have long been positioned between the telephone network and back-office systemsto perform tasks such as managing call flows, responding to a call with a pre-recorded message anddeveloping and managing touch-tone applications (e.g., press “1” if you would like to place an order,“0” if you would like customer service).

Given this entrenched positioning, VRU vendors made natural partners for Nuance andSpeechWorks as they sought to market core speech-recognition engines to automate touch-toneand other call-center functions. Likewise, as independent software vendors (unallied to a particularequipment vendor like IBM or Philips), Nuance and SpeechWorks emerged as the partners of choicefor VRU vendors. Within this market, VRU equipment manufacturers designed and integrated basicvoice applications utilizing speech recognition engines and toolsets from third-party speech vendorssuch as Nuance, SpeechWorks and others.

Following the solid endorsement of VRU vendors in the call center, speech recognition gained blue-chip references from thousands of live customer deployments and, due to the positive experiencecurve of these statistical models, experienced major gains in performance and accuracy. Inparticular, Nuance and SpeechWorks developed strong branded presences on par with, or greaterthan, incumbent vendors such as Philips, IBM and Lernout & Hauspiea,b in the U.S. market.

Distribution Is Evolving as the Voice Market Expands Beyond the Call CenterAs the voice market expands beyond the call center, it is moving outside the influence of the VRUvendor. Where speech vendors were chosen in the past almost entirely because of their relationshipwith an entrenched equipment vendor within a call center, purchase decisions are increasinglydriven by the performance of the recognition engine, time to market, range and usability of voiceapplications. Thus, along with a fivefold expansion of the voice market over the last few years, therehas been a shift from embedded applications to custom developed and pre-packaged applications—a trend we often see as an emerging market gains its footing. Without an entrenched vendor to relyupon, enterprises and other end users often look to other third parties for application developmentand implementation.


Figure 7: EVOLUTION OF THE VOICE MARKET

19992001

Phase I Phase II Phase IIICall Center Replacements Call Center Replacements Call Center Replacements

CRM CRMCall Management Call Management

mCommerce/vCommerce

Embedded Applications Designed by VRU

Vendors

Embedded Applications Designed by VRU

VendorsCustom Applications Custom Applications

Packaged Applications

Equipment VARs & OEMs Equipment VARs & OEMs Direct Sales Direct Sales

Systems Integrators Systems IntegratorsSoftware OEMs

Market

ApplicationDevelopment

Distribution


Speech Recognition Vendors Respond with Unique StrategiesCapitalizing on these trends, SpeechWorks has added direct marketing, services and an expandedproduct set—establishing itself as an end-to-end solutions provider. In addition to a staff of morethan 100 integration professionals designing and deploying custom applications, SpeechWorksmarkets dialog modules (reusable bundles of code for pre-build grammars, vocabulary editing anduser-interface designs) and toolsets to third-party integrators and end users to allow them to designand tune applications themselves while achieving a more desirable time to market. Lastly, thecompany offers end users a packaged software option with its SpeechSite applications for callrouting and management and information retrieval. Coupled with direct and indirect marketingefforts, the company has explored every avenue to exploit rising market demand.

Nuance has leveraged its core technology with a major emphasis on strategic distribution partners.Nuance (and to a lesser degree SpeechWorks) turned to the Big 5 integrators to supplement existingpartnerships with VRU and other equipment vendors and VARs to exploit the rising demand forapplications. Though projects have been limited with the Big 5 thus far—with Accenture, Cap Geminiand PriceWaterhouse Coopers each having had some involvement—we expect to see an increasedrole of these third parties in application design and deployment as these firms train more consultantsand gain familiarity with voice solutions. To support their effort, Nuance introduced SpeechObjects inMay 2000 (a step also taken by Philips) and a V-Builder toolkit—both steps aimed at improving theability of third parties to design and deploy compelling voice-based solutions based on itstechnologies.

Which approach is better?—We see pros and cons to both at this early stage of market development.Though indirect channel strategies lend themselves to more pervasive product reach, there is some


risk associated with a significant reliance of outside distributors at this early stage of the market.Vendors relying on third parties for application design and deployment have to be particularlyfocused on ensuring consistent quality throughout the user base. And, what is gained in early marketreach and customer diversity may not deliver the same insight into customer requirements or longer-term ability to become a standard. Like the Windows graphical user interface (GUI) or the Microsoftand Netscape (AOL) Internet browsers with which we are all so familiar, voice interfaces should seeexponential gains in usage the more familiar we become with them. The more frequently weencounter the same interface commands and options, the more user friendly they become, thebetter their performance (because of speech’s unique self-learning feature), the more likely theinterface will become a standard for voice applications across diverse global endmarkets. Longer term,as these interfaces become standards, we expect to see a classic shift toward packaged applications(and software OEMs) and third-party distribution—as evidenced by Phase III in Figure 7.

Figure 8: BROAD DISTRIBUTION PARTNERSHIPS AMONG MAJOR VENDORS

Nuance SpeechWorksDirect Sales Force (as of December 2000) 40 50Percent Indirect Sales2000 60% 37% (44% Q4:00)2001E 60% 40–50%Original Equipment Manufacturer (OEM)Alcatel XActive Voice (Cisco) XComverse XHewlett-Packard XIntela XIntertel XLucent X XMAXXAR XMitel XMotorola XNortel X XValue Added Reseller (VAR)Aspect X XAT&T XAvaya X XEdify X XIBM X XInterVoice-Brite X XPeriphonics/Nortel XSyntellect XSystems IntegratorsAndersen Consulting XCap Gemini XIBM XOmron XPriceWaterhouse Coopers XRedmond XSynchordia XSystex XTelera XUnisys XNote: Philips maintains strategic alliances with IBM, Andersen Consulting, PWC and Unisys.

Source: Company reports and Robertson Stephens estimates.


Voice XML—An Emerging Standard for Application Development

VoiceXML (vXML) is an emerging standard for voice application development backed by Motorola,Nokia, Cisco, Lucent, IBM, AT&T, Philips and the World Wide Web Consortium (W3C). vXMLprovides a high-level programming interface to speech-enabled content for application developers,service providers and equipment manufacturers.

vXML, a Win-Win for Developers and Content Providers…Because vXML is based on standard extensible markup language (XML), developers alreadyfamiliar with XML can build voice applications and services quickly and inexpensively. (Similarly,XML developers have told us it requires a period of hours to learn to program in the wireless mark-up language, or WML.) Thus, the advent of vXML should broaden the voice development communitybeyond today’s base and accelerate the proliferation of voice applications. vXML should also benefitWeb portals and other Internet information providers by providing them a way to expand the reach oftheir content/services from the 250 million global PC-Internet users to the larger universe oftelephony access devices—both wireless and wireline, 1.6 billion in 2000.

…Though Delivering on vXML’s Promise Is NOT Obstacle FreeThough vXML has great promise, we do not think its proliferation will be obstacle free. To speech-enable the Web using vXML, Web content must be recreated with vXML tags (requiring a voice userinterface, which is server-based, and the deployment of a vXML interpreter by a voice portal or otherhost) or new applications must be developed in vXML. We believe steps to voice-enable content arejust occurring now, with the help of speech technology vendors, such as Nuance and SpeechWorks,voice portals and service providers. Though portals and application developers such as BeVocal,SpeechWorks and TellMe have adopted vXML, the vast majority of applications at present (the 50–60% of the market dominated by enterprise customers) still rely upon closed APIs tied to a VRU orspeech-technology vendor, making it impossible for a user to go from one Web site to another ifthose sites are not part of the same interoperable group. Imagine using a traditional Internet browserthat only allowed access to certain sites. For additional perspective, we estimate far fewer than 1%of all Web pages are currently voice-enabled.

Figure 9: THE ROAD TO STANDARDS IS NOT SMOOTH

Promise Obstacles

1. Expand the voice development community byan order of magnitude.

1. vXML is a new standard (version 1.0 endorsed by W3Cin May 2000) and subject to the normal shortcomings offirst-generation technologies.

2. Raise the number of voice-capable Internetaccess devices by three- to fourfold.

2. The user is limited to accessing Web pages createdwith vXML—a small subset of the Web at present.

3. Speed the delivery of voice applications.

4. Separate voice applications and voice-enableddata from telephony and speech-processingresources.

3. Competitive approaches to speech-enabling Web sitessuch as a voice browser, which permit users to browseexisting Web sites (faster and less expensive toimplement, but less user friendly due to the filteringrequired to weed out graphics and embedded scriptsfrom existing Web pages).

Source: IDC and Robertson Stephens.


Onset of Standards Could Alter the Value Chain of the Voice Market

To deliver the full promise of vXML, the voice industry is likely to complete its transition from tightlyintegrated proprietary solutions (bundling VRU equipment with voice applications and speech-recognition platforms) to an open, more vertically integrated model. By separating the voiceapplication from the underlying speech-processing technology, vXML permits developers unversedin voice-enabling technology (like speech recognition and text-to-speech) to write applications forvoice services. This should increase the voice development community from tens of thousands tomillions of XML developers, in our view. However, applications supporting vXML will be required towork a vXML Interpreter and a voice interface so that telephony equipment can interpret and processverbal commands stored throughout the Web. These solutions will be interoperable with voice-enablement technologies like speech recognition and text-to-speech. We describe this in Figure 10.

Figure 10: UNCOUPLING VOICE EQUIPMENT AND APPLICATIONS

ApplicationDevelopment

EnvironmentRun-time Call Mgmt.

SpeechRecognition

TouchTone

Closed, VRUDominated Market Systems Integration

Applications

Voice Modules

SpeechRecognition

Text-to-Speech

SpeakerVerification

TouchTone

Open, vXMLDominated Market

vXML BrowservXML Interpretor

Key:

VRUSpeech Technology VendorThird Parties

Source: Company reports, IDC and Robertson Stephens.


Our Forecast: Speech Technology Vendors Move Up the Value Chain as vXMLProliferates the Voice MarketIn addition to maintaining robust and differentiated speech recognition engines, we believe speechtechnology vendors, such as Nuance and SpeechWorks, will move up the value chain. Alreadyoffering robust user interfaces in combination with speech recognition, we expect these vendors tosupplement these offerings with application development and deployment expertise.

Speech technology vendors such as Nuance and SpeechWorks have an advantage in the emergingmarket for vXML Interpreters and a defensible barrier to entry. To encourage loyalty and to protecttheir current position in the value chain, speech technology vendors are likely to extend theirleadership with speech recognition engines to the emerging market for vXML Interpreters. Atpresent, vXML Interpreters are available from Nuance, SpeechWorks and VoiceGenie—in varyingdegrees of compliance with the vXML 1.0 specifications. The vXML Interpreter acts as a middlewareprocessor between the XML applications and telephony equipment. Because these will be open, notproprietary, they will support any speech recognition engine. However, we believe the currentsuccess of vendors like Nuance and SpeechWorks is a defensible barrier to entry. Deployments byblue-chip customers in a diversity of markets demanding 98%-plus performance, scale andflexibility—such as banking, brokerage, distribution, travel—should reinforce and strengthen theirmarket share. Because of the self-learning feature of their speech recognition engines, whichimproves performance with each use, the accelerating momentum exhibited by these vendorsshould build a solid barrier to potential market entrants. We believe engine vendors such as Nuanceand SpeechWorks will continue to improve the user experience with their engines by improvinglinguistic models, vocabularies, authentication and natural language understanding.

The likely outcome of vXML is the development of a strong global voice user-interface standard(s),much like the graphical user interface (GUI) standard in Microsofta Windows. The key to acceptanceof voice applications has always been a user-friendly, effective user interface. Regardless of whodesigns and deploys voice applications or provides the speech recognition engine, this remains true.In the future, we believe these interfaces will continue be developed and marketed by Nuance andSpeechWorks. These vendors, already marketing Nuance Voyager and SpeechWorks’ VoiceXMLBrowser (via its Open Web Initiative), have a strong advantage in the interface market. First, theyhave multiple years of experience in developing effective user-friendly interfaces—no small task.Second, users are already accustomed to these interfaces via applications marketed by AmericanAirlines, United Airlines, Federal Express, eTrade, Fidelity and hundreds of others. SpeechWorks, inparticular, has a strong advantage in that every deployment of its technology uses the sameinterface—reinforcing its familiarity with every use, regardless of application, geography or industry.This is because of the direct role it takes in implementing applications based on its technology. WhileNuance’s interfaces vary to some degree from implementation to implmentation, it has someadvantage because so many third parties are already familiar with implementing its user-interfacetechnology into their applications. Thus, these players are the incumbents in the emerging voiceWeb. This is a far cry from the PC-Web, which allowed Microsoft to extend the look and feel ofWindows (text and graphics) to the Web (text and graphics).

SpeechWorks has already moved up the entire value chain… SpeechWorks currently offers the fullend-to-end suite of solutions including voice-enabling technology, vXML interpreters and browsers,applications and professional services. The upside to this positioning is the tight integration amongits solutions—often an advantage in time to market or performance. As detailed above,SpeechWorks also achieves consistency among these deployments and reinforces its user interfaceas a standard. SpeechWorks also gains customer control. With this approach, SpeechWorks’ brandis never invisible to the application vendor or end user. The downside to this approach is thatSpeechWorks may be considered a competitive application developer by third-party applicationdevelopers seeking to buy voice technology, such as a speech recognition engine. Thus far, thecompany has ably managed these tradeoffs achieving approximately 200 customer deployments by


more than 55 partners, including application vendors, equipment manufacturers, VARs and systemsintegrators. Refer to Figure 8.

…while Nuance is focused on balancing the search for value against goals to establish itstechnology as a global standard. Nuance has extended its stronghold in the voice technology market(speech recognition and speaker verification) to include vXML interpreters and its Voyager Browser.However, it has stopped short of application development or deployment, preferring to leveraging thebroad global reach of third parties. As evidenced in Figure 8, Nuance has signed with most majorequipment manufacturers, VARs and systems integrators, including the Big 5. While Nuances’strategy has led to a large number of customers (approximately 300 at present), its shortcoming hasbeen less consistency across these applications. To improve the quality and consistency of thesedeployments, Nuance has bolstered its development programs. In an effort to “standardize” its userinterface, the company has introduced Voyager, a voice browser third-party developers can re-useacross geographies, applications and end markets. Another downside to Nuance’s strategy is a lackof customer control as its dependence on third-party developers and implementers may render itstechnology “invisible” to the enterprises or carriers deploying them. We expect the company toaddress this with an increased presence of its direct sales force (currently measured at more than50) at major accounts.

Voice Portals Should Be Major Beneficiaries of VoiceXMLWe believe voice portals should be significant beneficiaries of vXML as they take on a central role inlinking vXML-enabled content across the Web. This central role assumes the voice portal functionsas a host, allowing other Web sites to support voice telephony access without having to maintain auser interface, vXML interpreter or speech-recognition engine. Thus, any Web site can support voiceaccess to its content by implementing vXML code defining its content and services. Voice portalswith a voice user interface and vXML interpreter may then manage this dialogue. Portals can alsooffer hyperlinks to vXML-enabled third-party Web sites, connecting their customers with outsideinformation, enhancing the breadth of the portal offering. To this end, protocols are evolving toswitch a call from site to site and return back to the portal.


SECTION III. VOICE TECHNOLOGY


Voice-Enabling Technologies—Speech Recognition at the Core

The voice market has existed for several years, although many early solutions targeted desktop-centric solutions focused on dictation or text-to-speech translations. We believe the success of morerecent technologies stems from a shift to telephony-centric solutions, which reach a far widermarket—1.6 billion telephony devices (wireless and wireline) relative to the 470 million PC’sworldwide—and save a lot more money by eliminating expensive labor-intensive functions (e.g.,operator, teleservice). This broad market potential, coupled with major technology improvements,has created a market approaching $1 billion. The technology gains to which we attribute this growthinclude better speech-recognition accuracy (90%-plus) and reliability (97–98% call completion rates),natural language understanding, barge-in or inturruption capabilities, increased vocabularies(50,000-plus words) and multi-lingual capabilities (20 on average).

We believe there are several critical building blocks to current voice-enabling technology.

Figure 11: THE BUILDING BLOCKS FOR VOICE APPLICATIONS

Speech Recognition

Voice Authentication Text-to-Speech

Voice XML Interpreter

Browser

Dev

elop

men

t To

ols

App

licat

ion

Com

pone

nts


• Speech Recognition—This is the fundamental element of voice-enabling technology andenables a caller and a computerized system to interact. This two-way exchange compares tointeractive voice response (IVR), where the system speaks to the caller (i.e., a recordedmessage saying “that number is no longer in service”) but the caller is unable to respond.Speech recognition engines utilize complex linguistic and statistical models to interpret andunderstand human speech. The statistical models are based on advanced linguistic rules andrecorded speech databases that gauge the probability that a phoneme—or small segment ofspeech—is part of a word or spoken phrase. Speaker independent recognition relies upon a vastdatabase of sampled information and phrases depending on word models created by individualsor phonetically developed models using linguistics. In some advanced systems, the models canprogram themselves for certain words or phrases that are frequently used by speakers. Nuance,Philips and SpeechWorks are the leaders in telephony-based speech recognition.

The speech recognition process begins by converting spoken words into digital waves and thensending those waves through a signal processor to cancel background noise. Once that iscompleted, the digital waves are divided into segments (words, phonemes, time sequences, etc.)


and then analyzed by the various models to determine the correct word. Figure 12 outlines thesteps necessary for speech recognition.

Figure 12: SPEECH RECOGNITION: A STEP BY STEP GUIDE

Step 1 Capture andDigitization

The VRU detects incoming speech, then Echo Cancellationremoves noise (or outgoing speech) from the caller’s speech. Thisenables the system to identify the speaker’s entire message,including interruptions or barge-in, within 100 milliseconds.

Step 2 SpectralRepresentation

This process facilitates the identification of speech by convertingthe message into sound waves (128 frequency bands), mappedinto a nonlinear spectral scale. Multiple techniques may be used toreduce variability caused by noise.

Step 3 Segmentation Speech recognition systems take different approaches tosegmentation. Frame-based or segment approaches, like thoseemployed by Nuance, take uniform segments of sound in 10milliseconds of duration, on average. SpeechWorks instead usesphonetic segments of 10–100 milliseconds long. The benefits ofphonetic segmentation are lower computing power and feweradditional searches (see below), while the benefit of framesegmentation may be a more rapid response.

Step 4 Modeling andClassification

The more a recognition solution is used, the larger its database ofmodels to which statistical models may be applied. Typically, anadministrator or application vendor will set parameters to aid thematching process. Alternatively, dynamic vocabulary systems donot assume the users’ context. Featuring a self-learning feedbackloop, modeling accuracy improves with the frequency of use.

Step 5 Search and Match The final phase of speech recognition involves matching thesegments of speech (frame or phonetic) against a known lexicon.

Sources: Company reports, IDC, Speech Technology and Robertson Stephens.

• Natural Language Understanding—One of the critical elements of voice-enabling technology,and frankly one of the key pieces lacking in earlier technologies, is natural languageunderstanding. Natural language understanding enables speech recognition technology to gobeyond basic word recognition and actually recognize the meanings of phrases. For example,natural language understanding technologies take into consideration the many differentvariations of words or answers (a system waiting for a “yes” answer should recognize “yeah” asacceptable). In addition, these systems include rules to ignore filler words such as “uh” or “like”and auxiliary words like “please” and “thanks.” Natural language should also allow developers toinclude vernacular or common phrases; for instance, a brokerage could apply rules so that if auser requests 300 shares of “MOT,” it knows to buy Motorola. Lastly, natural languageunderstanding permits more intelligent interaction with the user. For instance, a system may aska person who mumbles if they asked for Boston or Austin when booking a plane ticket, whileretaining information regarding credit card, departure time and place, rather than forcing thecaller to start the travel application all over again. Most of the leading speech recognitionvendors currently offer some degree of natural language understanding, but also look to this as amajor area of development.

• Text to Speech—Text-to-Speech (TTS), or speech synthesis, solutions translate data into voicemessages. The solutions mean text messages, like e-mails, Web pages or faxes, may be read tothe user over the phone. Or, if a cell phone user calls for driving directions from the car, they can


be read to the driver. TTS is one of the older voice technologies and has been dominated byLernout & Hauspie, IBM, Lucent and AT&T. In June 2000, SpeechWorks signed a five-year non-exclusive royalty-free agreement to license AT&T’s TTS technology (along with natural languageand large vocabulary recognition) and obtain co-marketing support. In exchange, the companyissued AT&T more than one million shares. Since then, the company has signed deals withYahoo!, AOL and others for its new “Speechify” branded solution. Nuance recently announcedavailibility of its own TTS software, “Vocalizer,” and the creation of a U.K.-based TTS lab. GivenLernout & Hauspie’s bankruptcy filing, we would expect its TTS assets to be auctioned to aninterested speech-recognition vendor.

• Voice Authentication—Voice authentication is expected to become a vital element of voicecommerce (vCommerce) and, when used in conjunction with a wireless data solution, a keyfacilitator of mobile commerce (mCommerce). Speaking, a user can create a “voiceprint” thatencapsulates the unique characteristics of his/her voice. These prints may be used for futurestatistical comparisons to be compared to a live voice for verification, in conjunction with spokenaccount numbers or PINs. One of the challenges of voice authentication technologies will be toaccurately read voiceprints in different levels of background noise and acoustic settings. Nuancelaunched its Verifier in June 2000 with several customer announcements. SpeechWorks OEMsthird-party verification solutions from T-Netix and others

Figure 13: THE CONVERGENCE OF VOICE AND DATA

Global SwitchedTelephone Network

Caller

VoiceResponseUnit (IVR)

BusinessData

IT AssetData

WebData



SECTION IV. VOICE VENDORS


Nuance and SpeechWorks Enjoy Accelerating Growth and SignificantBarriers to Entry

Players in the voice infrastructure market (also referred to as voice-enabling technology in thisreport) include Conversa, IBM, InfoTalk, Lernout & Hauspie, Locus Dialogue (now InfoSpace),Lucent Technologies, Microsoft (via its Speech.Net group and recent acquisition of Entropic),Nuance Communications, Philips Electronics Phonetic Systems, TEMIC and Vocalis. Unlike theaforementioned companies, Microsoft and IBM have focused on speech as a computer interface(when combined with keyboard and mouse) rather than as a telephony interface.

We believe Nuance, Philips and SpeechWorks dominate the large and fragmented market for voiceinfrastructure, where barriers to entry are high. Advanced telephony-oriented speech-recognitionengines include a self-learning feature that ensures these vendors realize exponential returns totheir growth. For example, SpeechWorks’ aptly named SmartRecognizer gets “smarter” the more itis used, because the statistics in its speech recognition engine have more examples to draw from.Thus, the performance gap between the top vendors—Nuance, Philips and SpeechWorks—and newmarket entrants widens with every product sales. As detailed extensively in Section II of this report,we believe the shift from a proprietary VRU-dominated market toward a more open application-driven market will accelerate demand for voice technology. At the same time, we believe the adventof standards such as vXML will encourage these vendors to continue their diversification from thesefoundation technologies toward value-added applications and services. SpeechWorks, and to alesser degree Philips, has already taken strides in this direction.

Figure 14: RELATIVE POSITIONING OF LEADING SPEECH TECHNOLOGY VENDORS

SpeechWorks Nuance PhilipsAccuracy High High Mid-High

Vocabulary/Grammar High High HighestCall Completion High High HighLanguages Supported 18 12 NA

Core RecognitionText-to-Speech High Low NASpeaker Verification Low High NA

Customers* 170-plus 260 300-plusEnterprise References United Airlines American Airlines Swedish Rail

eTrade FidelityCarrier References MCI WorldCom Sprint PCS AT&T WirelessInternet References AOL Lycos NA

Business Focus Voice Technology Voice Technology Voice TechnologyVoice Applications Limited Applications

Software Revenues 00 $16 million $37 million $50-plus millionSoftware Revenues 01E $35 million $64 million NASoftware Mix 01E 60% 76% NA*As measured and reported by these companies: (i.e., SpeechWorks customers with revenue more than $50,000).


The market for voice applications and services (portals and other) is larger and far less developedthan the infrastructure technology sector just now benefiting from the catalyst presented by the shiftaway from a proprietary, VRU-dominated market. While it is difficult to pinpoint winners and losers atthis nascent stage of the market, we review several of the emerging players on our watch list in thePrivate Company Profiles chapter of our report.


Public Company Profiles


January 31, 2001

Nuance Communications, Inc.NUAN $41.88

Marianne Wolk 212.407.0427Rating: Buy Candace K. Bryan 212.610.6109

Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 ERating: No Buy EPS:EPS 2001E: Yes $(0.24) 1Q $(0.26) $(0.11) $0.01EPS 2002E: No $0.16 2Q $(0.16) $(0.08) $0.02Rev 2001E: Yes $87.2 3Q $(0.12) $(0.05) $0.05Rev 2002E: Yes $130.9 4Q $(0.08) $0.00 $0.08

Year $(0.59) $(0.24) $0.1652-Week Range: $182–24 P/E — NM 261.8xFully Diluted Shares Outstanding (MM): 31.5Market Cap (MM): $1,319.2Average Daily Volume (000): 1,483Book Value/Share 12/00 $8.013-Year Secular Growth Rate: 100.00%Dividend/Yield: None/None Revenues (MM): 2000 2001 E 2002 EPrice/Book Value 12/00: 5.2x 1Q $7.9 $17.8 $28.2Total Debt/Tot Cap 12/00: NM 2Q $12.0 $19.8 $31.0Net Cash 12/00 (MM): $227.8 3Q $14.5 $23.2 $33.9Net Cash/Share 12/00: $7.24 4Q $17.4 $26.4 $37.8ROE 12/00: (4.2)% Year $51.8 $87.2 $130.9EBITDA/Share 2001E: $(0.60) Eqty Mkt/Rev — 15.1x 10.1x

• Nuance Reported Another Strong Quarter with EPS of $(0.08) Nicely Surpassing OurForecast by $0.03. Revenues rose 20% sequentially to $17.4 million, ahead of our $16.4 millionforecast, sustaining Q3’s strong momentum. Services, a leading indicator of new businessmomentum (interface design precedes software licenses), gained one point to 29% of thequarter’s mix. Gross margins fell two points to 77% due to this shift in mix and a ramp ininternational consulting hires not yet productive. Opex of $19.7 million was slightly above our$18.5 million forecast due to an increase in the sales force (now 50 quota-carrying) and other newhires and an $840,000 increase in bad debt reserves (prudence, not exposure). Excluding thisone-time expense, EBITA would have been closer to $(5.4) million—ahead of our $(5.5) millionforecast—and EPS would have been $0.02 higher. Deferred revenues rose $3.7 million to $10.7million. DSOs rose 21 days to 99 days (above the 75–85 day target), due in part to andexpanding international customer base (move from 21% of 1999 sales to 49% of Q4 mix added 5days) and back-end skew in quarterly linearity (5% shift added 5 days).

• Pipeline, Backlog and Demand from Existing Accounts Robust, Bucking Macro Trends.Though Nuance did see one deferral by an enterprise customer this quarter, the bulk of itsbusiness from telecoms, enterprises and Internet vendors appears strong. Nuance signed 60new contracts in the quarter (30–40% of revenues), boosted by strong sales from existingcustomers (60–70% of revenues). Nuance announced a major win at GM Onstar for in-vehiclehands-free access to Internet content (available to one million GM owners Q1), 15–20 customersfrom newer enterprise verticals (insurance, health care, energy) and a deal with Siebela.

• New Products, New Distribution and New Application Developers Support Outlook for70% Growth in 2001 and Breakeven Results by Q4—One Quarter Ahead of PriorEstimates.

• With the Stock Up Significantly Since January 9, 2001, the Pending Release of 12 MillionShares on February 2, 2001, Could Mean the Stock Is Volatile Near Term, in Our View.Though Nuance’s lockup ended late December, several VCs chose not to distribute shares until


the close of the company’s internal blackout period, February 2. Thus, we believe Nuance’srocketing valuation and small float could mean the stock is volatile over the next few weeks. Inlight of Nuance’s strong Q4 results, solid momentum and improving visibility, we continue tosupport the longer-term outlook for its fundamentals and that of the voice industry. In our view,Nuance is a solid long-term investment for investors looking to own a pure play in the dynamicgrowth of the rapidly evolving voice industry. We believe any weakness in its shares related tothe increase in its float represents an excellent buying opportunity.

Outlook Supports Our 70% Growth Forecast

We believe Nuance is well positioned for strong growth in 2001, buoyed by a large andunderpenetrated market opportunity measured in the billions of dollars, few competitors—SpeechWorks (SPWX $31.75) and Philips are the only other market leaders—, a major new productcycle and a substantial boost from a flurry of new applicaton developers and channel partners.

New Products… In Q4, Nuance dramatically increased its product portfolio from its core speechrecognition offering to include a Voice Web Server (for vXML), Vocalizer (text-to-speech for readingtext-based content such as e-mail, news and weather to telephony users) and voice instantmessaging (via its Speechfront acquisition for $10 million). Voyager, its voice browser introduced inSeptember, saw solid early deal momentum Q4 with a win at ZTel.

…New Channels… In Q4, the company ramped its partnerships with voice application serviceproviders (ASPs), which now stand at 30. These include well-funded names such as Tellme andBeVocal. Several other major agreements with VARs and OEMs were signed in the quarter—to beannounced shortly. Announced Q4 agreements include an OEM agreement with Siebel, a VARagreement with InterVoice-Brite and an agreement with Avaya (formerly Lucent). In all, Nuance nowcounts 175 different channel partners of varying types and channel partners contributed 80% of Q4results. Along with a buildup in internal sales and support resources, the company is well positionedto drive revenues to meet our 2001 forecast of $87 million, in our view.

…And a Huge Number of Nuance Application Developers Should Sustain RevenueMomentum. Nuance indicated it had amassed a base of 6,000 individual developers by Q4, adding700 each month. We believe this base is extremely important as open standards such as VoiceXMLshift the critical driver of new purchase decisions away from Nuance’s VRU-equipment relationshipsand toward Nuance’s role in adding value to voice applications—driving new revenues, reducingcosts and improving time to market.

Nuance Raised Guidance Marginally for 2001. Nuance guided 2001 revenues to $82 million–92million from $80–90 million to reflect a minor $2-million contribution from Speechfront’s voice-basedinstant messaging soluiton. Our point estimate for the year rises to $87 million from $85 million as aresult of this transaction. We believe this moderate improvement in guidance also reflects thecompany’s prudent evaluation of the current macro environment. This is true despite the strongdemand exhibited Q4 (mesured by deal flow, stable pricing, deferred revenue gains and pipelineincreases) and the favorable outlook for interest rates. License fees are expected to rise to 73% ofrevenues, up from 72% in 2000. The increase expected from new software products (detailedabove) is likely to be partially offset by a somewhat greater reliance on internal service and supportby overseas clients. As these international markets mature and new global distribution partners suchas Accenture train more personnel, we expect the license mix to accelerate further. Net, an EBITAloss of $16–19 million appears to remain likely for the company and we maintain our point estmateat the low end of that range. Our EPS forecasts remain almost unchanged, though we now showNuance breaking even in Q4 rather than in Q1:02.


Figure 15: NUANCE COMMUNICATIONS, INC.—2001 EPS FORECASTS

Q1:00 Q2:00 Q3:00 Q4:00 2001E

New Estimate $(0.11) $(0.08) $(0.05) $0.00 $(0.24)

Old Estimate $(0.09) $(0.07) $(0.05) $(0.03) $(0.23)


Q4 Results Find Fundamentals Remain Excellent

Figure 16: DIVERSITY PAYS OFF—STRONG CONTRACT WINS IN TELCO HELP DRIVE 2000GROWTH

Q4 Mix Q4 CustomersTelecom 36% British Telecom, Deutsche Telekom, Qwest, Sprint PCS,

Telstra, CosmoteEnterprise 53% American Airlines, British Airlines, Lloyds, Merrill Lynch,

Motorola, Sharepeople, Sears, Xelion15–20 in energy, health care, insurance

Internet 11% Tellme, GMTotal 100% 60-plus Total Wins


• Enterprises. Enterprises accounted for approximately 30 customer wins in the quarter and 53%of revenues. Results this quarter included Xelion, a subsidiary of Italian UniCredito Italiano,Sharepeople in the U.K., Merrill Lynch and several follow-on orders from existing customers. Thecompany also announced a major new deal with GM Onstar. As part of this agreement, Nuancegranted GM 100,000 warrants at $138.50. These have a two-year term as of August 1, 2000,and add a small non-cash charge to earnings as of the first quarter. Despite its high profile in anextremely attractive market segment (voice-enabled wireless data), GM was not a 10% customerin the quarter.

• Telecom. Telecom revenues were bolstered by major wins this quarter at Qwest, Sprint PCSand Cosmote, the largest wireless carrier in Greece.

• Portal. Portal momentum appears to be building on several fronts. First, from consumer servicessuch as Tellme; second, from 30 application hosting partners including Tellme, General Magicand others; and, third, from the emerging portal services of established players such Sprint PCSand GM. Longer term, we believe portal business models may expand to include per-subscriberusage and revenue sharing in addition to software license fees and consulting service fees.

Momentum Remained Strong in All Geographies…Since 1999, Nuance has bolstered its product offering for international markets to support more than22 languages and ramped direct and channel sales and support resources. For the year,international revenues rose fivefold to $25 million, up from $4 million in 1999. Revenues from theAmericas rose 74% yea over year to $27 million. We forecast a 60% increase from the Americasand 80% increase internationally in 2001.


Figure 17: NUANCE COMMUNICATIONS, INC.—REVENUE BY GEOGRAPHY ($ in millions)

Q3:00 Q4:00 Q/Q GrowthAmericas $6.796 $8.881 31%International $7.664 $8.533 11%Total $14.460 $17.414 20%


…but International Hiring Spree Comes to an End as Nuance Pauses to Enjoy aReturn on Its 2H:00 InvestmentNuance added many new consultants, primarily overseas, over the last few quarters. The companyindicated it grew consultants 40% in Q4, following a sizable 70% increase in Q3. As a result, servicemargins decreased two points in the fourth quarter, a trend we expect to see reversed in 2001 asNuance leverages this investment. Worldwide, Nuance added 94 new employees in Q4. Overseas,the company has yet to see the same kind of leverage from its partners that has enjoyed in theUnited States. With this staff on board, we believe the company has sufficient resources to supportstrong international growth in 2001, which we forecast at 50–52% of annual revenues.

Pricing Environment and Nuance’s Win Rate Remain StableNuance continues to realize approximately $600–700 per port sold to its customers. Deal sizesremained near $100,000, flat with Q3, though we anticipate some upward movement as more of itsproducts are sold in bundles (Verifier, Vocalizer, Voyager, etc.).


The CompanyNuance is a leading provider of a suite of speech recognition technologies designed to voice enableapplications for telcos, enterprises and Internet customers. The company uses broad partnerchannels including OEMs, VARs and Systems Integrators to distribute its core speech recognition,natural language understanding and voice authentication technologies. Nuance was founded in 1994and is based in Menlo Park, California.

Investment ThesisWe believe Nuance is one of the leaders in the emerging telephony-focused voice-enabling market,having already made broad inroads into key telco carriers, enterprises and traditional and voiceportal customers. Nuance offers one of the broadest suites of products in the industry, comparableonly to one close competitor—SpeechWorks. We believe this market, projected to reach more than$5 billion by 2005, is large enough for healthy competition and should continue to provide ampleopportunity for tremendous growth for the current market leaders. Nuance’s technology focus andbroad distribution strategy should serve it well as this relatively new market continues to blossom.

Investment RisksAmong the risks are: (1) the company has a history of losses; (2) the market for voice interfacesoftware is relatively new and future acceptance and usage is largely unknown; (3) claims againstthe company for misinterpretations of speech by customers or end users could result in litigation orunfavorable judicial decisions; (4) customer concentration, with the company’s top five customersaccounting for 82% in 1998, 67% in 1999; and (5) significant indirect sales channel (approximatelytwo-thirds of total revenues) that reduces company’s visibility.

Figure 18: NUANCE COMMUNICATIONS, INC.—QUARTERLY INCOME STATEMENT (in millions, except per share data)2000 2001E 2002E

FY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1999 2000 2001E 2002E 2003E

Licenses $6.0 $8.7 $10.5 $12.4 $12.7 $14.2 $16.8 $19.6 $20.9 $23.0 $25.3 $28.4 $13.6 $37.6 $63.3 $97.7 $136.7Services 1.9 3.3 4.0 5.0 5.1 5.6 6.4 6.8 7.3 7.9 8.6 9.5 6.0 14.3 23.8 33.3 45.6Revenues 7.9 12.0 14.5 17.4 17.8 19.8 23.2 26.4 28.2 31.0 33.9 37.8 19.6 51.8 87.2 130.9 182.3Trailing Q4 23 30 40 52 62 69 78 87 98 109 120 131Quarterly License Mix 76% 72% 72% 71% 71% 72% 73% 74% 74% 74% 75% 75% 70% 72% 73% 75% 75%

Cost of Licenses 0.0 0.0 0.0 0.0 0.1 0.0 0.0 0.0Cost of Services 1.6 2.1 3.1 3.9 4.0 4.3 4.8 5.0 5.4 5.8 6.3 6.9 5.5 10.7 18.1 24.4 31.9

Cost of Sales 1.6 2.1 3.1 3.9 4.0 4.3 4.8 5.0 5.4 5.8 6.3 6.9 5.5 10.8 18.1 24.4 31.9Licenses 6.0 8.7 10.4 12.4 12.7 14.2 16.8 19.6 20.9 23.0 25.3 28.4 13.6 37.5 63.3 97.7 136.7Services 0.3 1.2 0.9 1.1 1.1 1.3 1.6 1.8 1.9 2.1 2.3 2.6 0.5 3.6 5.8 8.8 13.7Gross Profit 6.3 9.9 11.4 13.5 13.8 15.5 18.4 21.4 22.8 25.1 27.6 30.9 14.1 41.1 69.1 106.5 150.4

Gross Margin 80% 82% 79% 77% 77% 78% 79% 81% 81% 81% 81% 82% 72% 79% 79% 81% 83%Selling and Marketing 6.8 8.1 8.5 10.7 10.9 11.3 12.5 13.5 14.0 15.0 15.4 16.3 17.6 34.1 48.1 60.7 73.3Research and Development 4.4 4.7 5.3 5.8 6.2 6.3 6.8 7.1 7.1 7.7 8.1 8.7 11.8 20.2 26.5 31.7 40.5General and Administrative 1.7 2.6 2.5 3.2 3.2 3.4 3.6 3.8 3.9 4.0 4.1 4.3 3.5 10.0 14.0 16.3 20.9Operating Expenses 12.9 15.4 16.3 19.7 20.3 21.0 23.0 24.4 25.0 26.7 27.7 29.3 32.9 64.2 88.6 108.7 134.6Opex Pct 162% 128% 113% 113% 114% 106% 99% 92% 89% 86% 82% 77% 168% 124% 102% 83% 74%

(5.4)EBITA (6.5) (5.5) (4.9) (6.2) (6.5) (5.5) (4.5) (3.0) (2.2) (1.6) (0.1) 1.7 (18.8) (23.2) (19.5) (2.2) 15.8

EBITA Margin (82)% (46)% (34)% (36)% (37)% (28)% (20)% (11)% (8)% (5)% 0% 4% (96)% (45)% (22)% (2)% 9%Interest Income (expense) 0.3 1.2 1.5 3.7 3.1 3.0 3.0 2.9 2.9 2.9 2.9 2.9 0.7 6.7 12.0 11.4 14.8Other IncomePretax Income (6.2) (4.4) (3.4) (2.5) (3.4) (2.5) (1.6) (0.1) 0.7 1.2 2.8 4.5 (18.1) (16.5) (7.6) 9.2 30.6

Taxes 0.0 (0.1 (0.1 (0.1 (0.3) (0.5) (1.1) (1.8) 0.0 (0.4) 0.0 (3.7) (12.2)Net Income—Operating, Before Amort. (6.2) (4.5) (3.5) (2.6) (3.4) (2.5) (1.6) (0.1) 0.4 0.7 1.7 2.7 (18.2) (16.8) (7.6) 5.5 18.4

Non-Cash Compensation Expense (1.0) (1.1) (1.1) (1.6) (1.5) (1.5) (1.5) (1.0) (0.9) (0.9) (0.8) (0.8) (0.3) (4.9) (5.4) (3.3) (2.5)Amortization (0.3) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) (0.7) 0.0 (0.3) (3.0) (3.0) (3.0)Extraordinary Items (1.5) 0.0 (1.5 0.0 0.0 0.0

Reported Net Income (7.2) (5.7) (4.6) (6.0) (5.7) (4.7) (3.8) (1.8) (1.2) (0.9) 0.1 1.2 (18.5) (23.5) (15.9) (0.7) 12.9Earnings per Share

Quarterly Operating $(0.26) $(0.16) $(0.12) $(0.08) $(0.11) $(0.08) $(0.05) $(0.00) $0.01 $0.02 $0.05 $0.08Quarterly Reported $(0.31) $(0.20) $(0.15) $(0.19) $(0.18) $(0.15) $(0.12) $(0.05) $(0.04) $(0.03) $0.00 $0.03Trailing Q4 Operating $(1.18) $(1.13) $(0.93) $(0.59) $(0.46) $(0.38) $(0.32) $(0.24) $(0.12) $(0.02) $0.08 $0.16 $(0.97) $(0.59) $(0.24) $0.16 $0.51Trailing Q4 Reported $(1.24) $(1.23) $(1.07) $(0.85) $(0.72) $(0.67) $(0.63) $(0.49) $(0.35) $(0.23) $(0.11) $(0.02) $(0.99) $(0.83) $(0.49) $(0.02) $0.36

Average Shares Outstanding 23.49 28.8 29.8 31.5 31.9 32.3 32.7 33.1 33.6 34.1 34.6 35.1 18.7 28.4 32.5 34.3 36.3Margin AnalysisRevenue MixLicense 76% 72% 72% 71% 71% 72% 73% 74% 74% 74% 75% 75% 70% 72% 73% 75% 75%Services 24% 28% 28% 29% 29% 28% 27% 26% 26% 26% 25% 25% 30% 28% 27% 25% 25%Revenue Growth Q/QLicense 51% 44% 20% 18% 3% 12% 19% 16% 7% 10% 10% 12%Services 13% 73% 21% 26% 1% 9% 14% 7% 7% 9% 9% 10%Total 39% 51% 20% 20% 2% 11% 17% 14% 7% 10% 10% 11%Revenue Growth Y/YLicense 46% 211% 291% 209% 111% 63% 61% 58% 65% 62% 50% 45% 71% 176% 69% 54% 40%Services 133% 89% 137% 198% 167% 68% 59% 35% 43% 42% 35% 39% 57% 140% 67% 40% 37%Total 60% 164% 231% 206% 124% 65% 60% 52% 59% 57% 46% 43% 66% 165% 68% 50% 39%

License 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Services 16% 36% 24% 22% 21% 23% 25% 27% 26% 27% 27% 27% 8% 25% 24% 27% 30%

Gross Margin 80% 82% 79% 77% 77% 78% 79% 81% 81% 81% 81% 82% 72% 79% 79% 81% 83%Selling and Marketing 85% 67% 59% 62% 61% 57% 54% 51% 50% 49% 46% 43% 90% 66% 55% 46% 40%Research and Development 55% 39% 37% 33% 35% 32% 30% 27% 25% 25% 24% 23% 60% 39% 30% 24% 22%General and Administrative 21% 22% 17% 18% 18% 17% 16% 14% 14% 13% 12% 11% 18% 19% 16% 12% 11%

Operating Expenses 162% 128% 113% 113% 114% 106% 99% 92% 89% 86% 82% 77% 168% 124% 102% 83% 74%Operating Margin (82)% (46)% (34)% (36)% (37)% (28)% (20)% (11)% (8)% (5)% 0% 4% (96)% (45)% (22)% (2)% 9%Pretax Margin (78)% (37)% (23)% (14)% (19)% (13)% (7)% 0% 2% 4% 8% 12% (93)% (32)% (9)% 7% 17%

Tax Margin 0% (3)% (3)% (5)% 0% 0% 0% 0% (40)% (40)% (40)% (40)% 0% 2% 0% (40)% (40)%Net Income Margin (78)% (38)% (24)% (15)% (19)% (13)% (7)% 0% 1% 2% 5% 7% (93)% (32)% (9)% 4% 10%



January 9, 2001

Nuance Communications, Inc.NUAN $29.50


Change in . . . Yes/No Was Is FY December 2000E 2001 E 2001 ERating: New Buy EPS:EPS 2000E: New $(0.62) 1Q $(0.26) $(0.09) $0.01EPS 2001E: New $(0.23) 2Q $(0.16) $(0.07) $0.03EPS 2002E: New $0.16 3Q $(0.12) $(0.05) $0.05Rev 2000E: New $50.8 4Q $(0.11) $(0.03) $0.08Rev 2001E: New $84.6 Year $(0.62) $(0.23) $0.16Rev 2002E: New $125.1 P/E NM NM NM

52-Week Range: $182–24FD Shares Outstanding (MM): 29.8Market Cap (MM): $879.1Average Daily Volume (000): NABook Value/Share 9/00: $8.493-Year Secular Growth Rate: 100.00%Dividend/Yield: None/None Revenues (MM): 2000E 2001 E 2002 EPrice/Book Value 9/00: 3.5x 1Q $7.9 $17.7 $27.0Total Debt/Total Cap 9/00: 0.1% 2Q $12.0 $19.7 $29.6Net Cash 9/00 (MM): $93.3 3Q $14.5 $22.0 $32.4Net Cash/Share 9/00: $3.13 4Q $16.4 $25.2 $36.2ROE 2001E: (5.5)% Year $50.8 $84.6 $125.1ROIC 2001E: (12.5)% Eqty Mkt/Rev 17.3x 10.4x 7.0x

• Nuance Is a Leading Provider of Voice Solutions. The market for voice solutions includinginfrastructure, applications and services is currently estimated at approximately $1 billion andforecasted to reach $5–10 billion worldwide by 2005. We expect Nuance to lead this market,along with a handful of competitors such as SpeechWorks (SPWX $20.13) and Philips. Demandfor Nuance’s voice-enabling technologies is a direct play on several major growth trends:

− Call Management and the rise in voice solutions to replace expensive operator, touch-tone and/or PBX routing;

− CRM—Rising demand for voice-automated call center and customer relationshipmanagement (CRM) solutions to reduce costs, improve customer satisfaction and loyalty;

− Voice Web Interfaces for Wireless Data navigation and use of special purpose voiceportals to access information via wireline and wireless phones;

− mCommerce and the increasing use of telephone to initiate transactions, check ordersand inventories and other eBusiness services.

• Business Strategy Focuses on Enabling Technology… Nuance is pursuing a technology-centric business strategy focused on core speech recognition, voice authentication, browser andVoice XML technologies. The company aims to use a network of third-party application developers,systems integrators and equipment vendors to secure global proliferation of its technology. Nuancedoes have a small services effort, which we believe could be expanded to widen marketacceptance, share best practices and speed customer deployments of voice applications.

• …Promoted by Global Partnerships and Distribution Channels. By positioning itself as a“partnering company,” we believe Nuance has one of the broadest potential reaches amongspeech infrastructure vendors. While the channel strategy can lead to lower visibility and lumpy


sales patterns, the increased distribution should provide balanced exposure across multipleindustries and help shoulder downturns in any geography or market.

• Wide Reach Allows for Broad Customer Base. Nuance counts more than 260 customers inthe telco, enterprise and Internet markets, providing the company a diversified customer base.Year to date, enterprises account for 60% of total revenues, telecom service providers 25% andInternet-related companies 15%.

• Strong Business Model Should Mean Excellent Growth and Expanding Profitability.Nuance is well positioned to enjoy strong growth of at least 50% as it adds new products (i.e.,Voyager browser and upcoming text-to-speech solutions) and expands globally through newchannels, in our view. We forecast strong license sales that should lead to breakeven results bythe fourth quarter, with an accelerated timetable possible in a more favorable macroeconomicenvironment. Though we believe Nuance’s emphasis on an indirect sales channel provides thewidest possible reach for its solutions, we believe this reliance lowers visibility and adds a riskfactor for the quarterly results. Nuance has historically booked 60–70% of its business in the lastmonth of the quarter, largely due to the late sales reports from resellers. With this pattern, webelieve it could be difficult to accurately gauge the company’s performance until the last week orso of the quarter.

• Initiating Coverage of Nuance with a Buy Rating. We forecast Nuance will achieve averageannual growth of at least 50% over the next three years. We expect decreasing losses in 2001 toresult in a $(0.23) EPS versus our $(0.65) EPS estimate in 2000. Breakeven should occur in thefirst quarter of 2002, which should lead to full-year 2002 EPS of $0.16. At $29.50, the stock istrading at approximately 56x our 2003 EPS forecast of $0.53, 11x our 2001 and 8x our 2002revenue projection. Our recommendation is only oriented toward longer-term investors interestedin a pure play on the spectacular long-term opportunity presented by the voice market—approximately $5–10 billion. We believe Nuance is well positioned to join a handful of competitors,including SpeechWorks and Philips, to dominate this market capturing 70–85% share.

Investment Summary

• Nuance Focuses on the Technology Enabling Voice Applications. Nuance follows atechnology-centric business strategy, choosing to focus on core speech recognition, voiceauthentication, browser and Voice XML technologies. Though the company does have a smallservices effort, we believe the current strategy will be to provide customers access to therecently introduced application developers kit and toolkit, in addition to a broad range ofprofessional services experts.

We believe Nuance has built one of the most complete technology stacks in the voiceinfrastructure industry and will continue to build its expertise and incorporate productadvancements via internal development, partnerships and, possibly, acquisitions.

− Major Enhancements to Speech Recognition Engine in Nuance 7 Should DriveIncremental Growth. Launched in June 2000, Nuance 7 incorporates several newfeatures including barge-in capabilities (so the user can interrupt), natural languageunderstanding and large vocabulary (60,000-plus words), all of which we consider tobe critical components of user-friendly voice applications. The more user friendly, themore likely enterprises, carriers and Internet vendors are apt to deploy these systemsas replacements for human operators and customer service representatives.

− Additional Languages Should Fuel International Expansion. Nuance 7 supports 20different languages and dialects, providing Nuance substantial opportunities in


international markets (international accounted for 50% of Q3:00 revenues). At year-end1999, Nuance counted more than 150 customers for its software platform and weestimate that number could exceed 300 at year-end 2000.

− Voice Authentication and Voice Browser add additional value. Nuance offers itscustomers important value-add with its Verifier and Voyager products, whichrespectively enable voice authentication and voice browsing. Verifier works bycreating user “voiceprints”, allows for rapid verification for site access, vCommerce orother key applications. Voyager is similar to the concept of a Web browser, butallows users to access voice-enabled Web content by simply speaking the site, nameor information desired.

− Future Technology Advancements Could Include Text-to-Speech Capabilities.We believe the company will supplement current third-party relationships with strategicpartnerships, internal development or acquisitions of enhanced text-to-speechcapabilities over the next 6–12 months.

• Nuance’s Per-Port Pricing Should Fuel Solid Growth from Existing Customers. Nuanceprices its voice infrastructure solutions on a per-port basis, with additional ports required asapplication richness develops. For instance, one port could support 200–300 subscribers forvoice dialing alone, but the inclusion of a Voyager voice browser offering could reduce capacityto 20–30 subscribers per port. Though pricing can vary depending on certain OEM relationships,we estimate that the per-port price for Nuance’s software alone is approximately $600–700.Across all industry segments, new customer orders tend to be approximately 100 ports (or$60,000–70,000), while repeat orders tend to be substantially larger in the range of 320–370ports (or $220,000) for an overall average deal size of $130,000. We believe repeat businesscurrently accounts for 30–50% of quarterly revenues.

• We Forecast 50% Average Annual Growth from Broad Customer Base IncludingEnterprise, Telecom and Internet Markets. Nuance counts more than 260 customers in thetelco, enterprise and Internet markets, providing the company a broad diversified customer base.Year to date, enterprise has accounted for 60% of total revenues, telco 25% and Internet-relatedcompanies 15%.

− We Believe the Telecom Market Promises the Fastest Growth for Nuance.Growing to 25% of revenues through Q3:00, we believe the rapid growth of voiceenabling in the telco market could lead to Nuance generating as much as 50% of itstotal revenue from this segment over the next 2–3 years. Already, Nuance hascaptured the top four wireline carriers and two of the top four wireless carriers in theUnited States. Nuance’s solutions allow carriers to offer several benefits to end users,including voice-activated dialing, spoken access to e-mail and, perhaps most important,they allow carriers to create voice portals for easier browsing on wireless devices withsmall screen and tedious key-in requirements. Coupled with the boom in wireless dataservices, we expect voice-enabling technologies to become a key part of wirelesscarriers’ strategy to raise subscriber revenues and improve customer retention.


Figure 19: NUANCE COMMUNICATIONS, INC.—TELCO CUSTOMER OVERVIEW

CarrierDate

Announced Partner ServiceSprint PCS 8/3/00 N/A Voice-activated dialing and information services.

Telus 8/23/00 N/A Voice-enabled apps for business customers.

Deutsche Telekom 6/12/00 N/A Voice portal.


• Enterprises represent the largest consumers of Nuance speech-recognitiontechnology. Enterprise revenues have traditionally been Nuance’s strongest customerbase, with the segment accounting for 60% of total revenues for the first three quarters of2000. We view enterprises as one of the major beneficiaries of voice technology, as itstands to not only improve customer service (automating call centers and customerrelationship management solutions), but also dramatically reduces associated costs.Nuance’s systems have been proven to reduce call center costs by up to 90%—turning anagent-supported call that could cost $1.00 to $15.00 into a voice-activated customerservice call that costs only $0.10 to $0.85. This cost reduction is achieved through moreefficient handling of calls, lower overhead costs and lower per-call costs. Our own analysisdemonstrates an average per-call savings of $0.86 over a four-year period, with an agent-assisted call averaging $0.95 and a speech-enabled call averaging only $0.09.

Figure 20: NUANCE COMMUNICATIONS, INC.—ENTERPRISE CUSTOMER OVERVIEW

EnterpriseDate

Announced Partner Service

Charles Schwab 1996 NA Voice-recognition retail brokerage services anduser voice authentication.

American Airlines 1998 Periphonics/Nortel Speech-recognition engine for voice driven flightinformation and frequent flyer program accessand upgrade requests.

Home ShoppingNetwork

6/29/99 Edify Speaker-verification system.

UPS 1998 NA Nationwide, voice activate, automated package-tracking system.

Ernst & Young 8/16/00 Lyrix Voice portal.


• The Internet represents an emerging growth opportunity for Nuance. Internet andInternet-related companies currently represent approximately 15% of Nuance’s business,but we believe long-term growth prospects are excellent as existing Web portals (i.e., AOL,Yahoo!, Lycos) begin to capitalize on the potential of the “voice Web.” Utilizing Nuance’ssolutions, Internet companies may offer end users access to Web content, e-mail andvCommerce from any wired or wireless phone. Though Nuance’s competitors have seenmore initial success with some of the traditional Internet leaders, those early contracts (likethose announced with Yahoo! by SpeechWorks) may still allow Nuance opportunities tosell speech solutions for additional applications. Nuance is only recognizing revenues from


portals when the payment is received. In addition, approximately two-thirds of sales toportals is direct, allowing the company better visibility on the customers needs and abilityto pay.

Figure 21: NUANCE COMMUNICATIONS, INC.—INTERNET CUSTOMER OVERVIEW

Internet Date Announced Partner ServiceLycos 8/17/00 Mobilee Voice portal.ShopTalk 9/6/00 TellMe Voice commerce platform for shopping.TellMe 4/10/00 NA Voice portal.BeVocal 5/8/00 NA Strategic marketing and development agreement

for voice-driven content and services.


• Nuance Is Expanding Its Distribution Model to Include Multiple Distribution Channels. Bypositioning itself as a “partnering company,” we believe Nuance has one of the broadestpotential reaches among speech infrastructure vendors. Approximately two-thirds of Nuance’srevenues are generated from indirect channels. Indirect sales volumes have been increasing asa percent of revenues over the past few years, starting at 31% in 1998, moving to 56% in 1999and YTD 2000 hitting approximately 67%. Though we expect this percentage to stabilize nearcurrent levels, the company has been adding additional market reach via OEM agreements withsoftware vendors and eCommerce companies as well as new relationships with systemsintegrators. Moreover, there are now 15 internal sales people dedicated to the partner channel.As firms like Arthur Andersen and CapGemini Ernst & Young become more active, we expectmore traditional VRU equipment vendor partners to decline in importance for the company.Periphonics (part of Nortel) accounted for 19% of total revenue in 1998 and 25% in 1999.

The direct sales force consists of approximately 40 people, all assigned to different geographicareas and charged with both direct sales and maintaining relationships with sales in directaccounts. As a rule, direct sales are focused on voice portals and some enterprises (i.e., Fidelity).

Figure 22: NUANCE PARTNERS—INDIRECT SALES CHANNEL

OEMAlcatel MitelComverse MotorolaIntertel NortelLucentVARAspect InterVoice-Brite*Avaya Periphonics/NortelEdify SyntellectIBMSystems IntegratorsAndersen Consulting PriceWaterhouse CoopersCap Gemini RedmondIBM SynchordiaOmron

*New



• A Leader in a Close Race, We Believe Nuance Benefits from High Barriers to Entry. Webelieve this market, projected by at least $5–10 billion by 2005 is large enough for healthycompetition and should continue to provide ample opportunity for tremendous growth for thecurrent market leaders—Nuance, SpeechWorks and Philips. As these leaders continue todominate the market, we believe first-mover advantages and self-learning speech recognitionengines (leading to better performance with usage) will create high barriers to entry that will bedifficult for later entrants to overcome.

• The Difference Between Nuance and Its Nearest Competitor, SpeechWorks, Comes Downto Strategy. We believe the key differentiating factor between Nuance and SpeechWorks is thestrategy with which they respectively offer their technology. As it stands at present, Nuance hasa technology-driven focus, with a partnering philosophy for distribution and professional services.This is evidenced in the financial results of Nuance, which should derive two-thirds of itsrevenues from indirect sales channels and approximately 75% from software sales in 2000.Nuance has chosen to partner with a wide arrange of professional services, IVR vendors andothers to provide wider distribution and a more complete end-to-end solution for its customers. Incontrast to this model is SpeechWorks, which has chosen to approach the market with a morecomplete internal end-to-end offering, balancing its technology sales with a suite of applicationsand professional services. This is evidenced by SpeechWorks financial results that indicate 77%of revenues should be derived from direct sales and 39% from professional services for 2000.We believe these distinct models are blurring somewhat as both companies seek acceleratedgrowth. SpeechWorks is building strong third-party relationships with equipment, software andservice vendors as it strives to grow internationally. At the same time, we believe Nuance isbuilding its internal services to help accelerate market acceptance for innovative new voiceapplications.

• Attractive Business Model Should Mean Nuance Experiences High Returns on Its Growth.We forecast Nuance realizes at least 50% growth over the next three years, primarily from high-margin software licenses, which should reach 75–80% of its mix during the same time frame.This favorable mix, coupled with ongoing scale economies, should mean considerable marginexpansion during the next several years and produce breakeven results by Q4:01, if not sooner.We forecast EPS of $(0.23) in 2001, $0.16 in 2002 and at least $0.53 by 2003. Given theseforecasts, we believe Nuance can improve its return on equity from (5)% Q3:00 to more than10% by the fourth quarter of 2003 (7% for the full year). We believe return on invested capital of(13)% for Q3:00 should improve to approximately 33% by Q4:03 (16% for the full year).

Valuation

Nuance’s recent stock performance has been negative, along with the market, declining significantlyfrom its high set last August. In addition, we believe the stock has been punished recently as a resultof the end of a lockup in late December.


Figure 23: NUANCE COMMUNICATIONS, INC.—VOICE SOLUTION STOCK PERFORMANCE

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At $29.50, Nuance’s stock is trading at approximately 56x our 2003 forecast and 11x our 2001revenue and 8x our 2002 revenue projections. At current levels, we recommend the stock only forlonger-term investors interested in the spectacular opportunity presented by the voice market—approximately $5–10 billion. We believe Nuance is well positioned to join a handful of competitors,including SpeechWorks and Philips, to dominate this market capturing 70–85% share. We believeNuance’s leading voice technology, attractive software-based business model and solid customerbase should position it to enjoy substantial upside to our projections as demand for call centerreplacement, customer relationship management, call management, wireless Web navigation andmCommerce services accelerate.

Figure 24: NUANCE COMMUNICATIONS, INC.—COMPARABLE COMPANIES TABLE(in millions, except per share data)

% ∆∆∆∆ From Market Enterprise Mkt Val/Rev Ent Mkt Val/RevTicker 1/8/01 52-Week Hi Shares Value Value 2001E 2002E 2001E 2002E

Nuance NUAN $29.50 (84)% 31.3 925 $831 11x 7x 10x 7xSpeechWorks SPWX $20.13 (81)% 29.8 600 $480 10x 6x 8x 5x

Average 11x 7x 9x 6x

Price toRevenues (MM) Growth EPS P/E Net Cash/ Net Cash/ Price to Bk

Ticker C2000E C2001E C2002E 00/01 01/02 C2000E C2001E C2002E C2001E C2002E Share /\Share Val/ ShareNuance NUAN 50.8 84.6 125.1 67% 48% $(0.62) $(0.23) $0.16 NM 184x 3.13 9x 3xSpeechWorks SPWX 29.3 58.2 101.5 99% 74% $(0.98) $(0.66) $(0.28) NM NM 4.29 5x 4x

Average 83% 61% 7x 4x

Source: Bridge, company reports and Robertson Stephens estimates.


Company Highlights

Nuance is a leading provider of a suite of speech recognition technologies designed to voice enableapplications for telcos, enterprises and Internet customers. The company uses broad partnerchannels including OEMs, VARs and systems integrators to distribute its core speech recognition,natural language understanding and voice authentication technologies. Nuance was founded in 1994and is based in Menlo Park, California.

ProductsNuance’s stack includes many of the most crucial elements of speech technology, including speechrecognition and voice authentication technologies. More recent additions to the stack include a voicebrowser, a vXML server, a developer’s toolkit and customizable software components. Nuance’sprimary focus was on its speech recognition server and authentication products, with specialfeatures including natural language expertise, extensive vocabularies, 12 differentlanguages/dialects (with several more to be launched soon and biometric speaker verification andacoustic differential considerations for verification. The company has recently branched out intomore service-oriented offerings, including the toolkit and development tools. We believe these typesof offerings are in line with Nuance’s current strategy to focus on providing its customers withtechnology, leaving application development and customization to the customers or external systemintegrators that choose to license its tools.

Figure 25: THE NUANCE STACKA

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Figure 26: NUANCE COMMUNICATIONS, INC.—PRODUCT OVERVIEW

Product GA Date FunctionalityNuance 7 June 2000 Software server that provides speech recognition and natural language

understanding capabilities. Operates on standard CPU hardwarearchitectures and operating systems (UNIX, Windows NT). Can work onsingle or multiple hardware servers. Works in 20 languages and dialects.(including English—U.S., U.K., Australia, South Africa, Singapore;Spanish—Latin American, European; Brazilian Portuguese; German;Italian; Greek; French—Canadian, European; Japanese; Chinese—Mandarin, Cantonese; Czech; Dutch; Norwegian and Swedish).

Nuance Express A low-priced “starter” product for Nuance 7 that offers comparablescalability and accuracy but with more entry-level applications thatrecognize limited phrases. Can be easily upgraded to Nuance 7.

Nuance Verifier June 2000 Software server that provides voice authentication based on uniquepredetermined user voice qualities or “voiceprints.” Users createvoiceprints by speaking certain phrases prior to use. Can be easilyintegrated with the Nuance 7 platform.

Speech Objects May 2000 Software components containing various grammars and dialogframeworks that can be used to create and customize voice user-application interfaces utilizing published APIs.

V Builder Oct 2000 Developers toolkit that provides APIs to the Nuance platform andincludes SpeechObject software components. Can be integrated withC/C++ or Java telephony applications. Also allows developers to mapexisting HTML content to SpeechObject application components.

Nuance Voyager Sept 2000 Voice browser providing a standard voice user interface for access totraditional telephony applications, voice portals and voice-enabledInternet content. Similar to the concept of a Web browser.

Voice Web Server Sept 2000 VoiceXML interpreter, speech recognition and authentication.


CompetitionCompetitors in the voice interface software market include IBM, ITT Industries, Lernout & Hauspie,Locus Dialogue (Infospace), Lucent Technologies, Philips Electronics, SpeechWorks and T-NETIX.The potential for other competition exists as many companies, including Microsoft, have madeinvestments in voice interface technology.


The CompanyNuance is a leading provider of a suite of speech recognition technologies designed to voice enableapplications for telcos, enterprises and Internet customers. The company uses broad partnerchannels including OEMs, VARs and Systems Integrators to distribute its core speech recognition,natural language understanding and voice authentication technologies. Nuance was founded in 1994and is based in Menlo Park, California.

Investment ThesisWe believe Nuance is one of the leaders in the emerging telephony-focused voice-enabling market,having already made broad inroads into key telco carriers, enterprises and traditional and voiceportal customers. Nuance offers one of the broadest suites of products in the industry, comparableonly to one close competitor—SpeechWorks. We believe this market, projected to reach more than$5 billion by 2005, is large enough for healthy competition and should continue to provide ampleopportunity for tremendous growth for the current market leaders. Nuance’s technology focus andbroad distribution strategy should serve it well as this relatively new market continues to blossom.

Investment RisksAmong the risks are: (1) the company has a history of losses; (2) the market for voice interfacesoftware is relatively new and future acceptance and usage is largely unknown; (3) claims againstthe company for misinterpretations of speech by customers or end users could result in litigation orunfavorable judicial decisions; (4) customer concentration, with the company’s top five customersaccounting for 82% in 1998, 67% in 1999; and (5) significant indirect sales channel (approximatelytwo-thirds of total revenues) that reduces company’s visibility.

Figure 27: NUANCE COMMUNICATIONS, INC.—QUARTERLY INCOME STATEMENT ($ in millions, except per share data)1999 2000 2001E 2002E

FY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4E Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1999 2000E 2001E 2002E 2003E 2004ELicenses $4.1 $2.8 $2.7 $4.0 $6.0 $8.7 $10.5 $12.2 $13.3 $14.9 $16.7 $19.2 $20.5 $22.6 $24.8 $27.8 $13.6 $37.4 $64.1 $95.8 $134.1 $181.0Services 0.8 1.8 1.7 1.7 1.9 3.3 4.0 4.1 4.4 4.8 5.3 6.0 6.4 7.0 7.6 8.3 6.0 13.4 20.6 29.3 40.2 53.5Revenues 5.0 4.5 4.4 5.7 7.9 12.0 14.5 16.4 17.7 19.7 22.0 25.2 27.0 29.6 32.4 36.2 19.6 50.8 84.6 125.1 174.3 234.5Trailing Q4 15 16 17 20 23 30 40 51 61 68 76 85 94 104 114 125Quarterly License Mix 83% 61% 61% 70% 76% 72% 72% 75% 75% 75% 76% 76% 76% 76% 77% 77% 70% 74% 76% 77% 77% 77%

Cost of Licenses 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.0 0.1 0.3 0.4 0.5 0.7Cost of Services 1.2 1.4 1.3 1.6 1.6 2.1 3.1 3.3 3.5 3.7 4.0 4.5 4.8 5.1 5.6 6.1 5.5 10.1 15.7 21.6 28.1 35.8

Cost of Sales 1.2 1.4 1.3 1.6 1.6 2.1 3.1 3.4 3.5 3.8 4.1 4.6 4.8 5.2 5.7 6.2 5.5 10.2 16.0 21.9 28.7 36.5Licenses 4.1 2.8 2.7 4.0 6.0 8.7 10.4 12.2 13.2 14.8 16.6 19.1 20.4 22.5 24.7 27.7 13.6 37.3 63.8 95.4 133.5 104.9Services (0.4) 0.4 0.4 0.1 0.3 1.2 0.9 0.8 0.9 1.1 1.3 1.5 1.7 1.9 2.0 2.3 0.5 3.3 4.9 7.8 12.1 9.4Gross Profit 3.8 3.2 3.1 4.1 6.3 9.9 11.4 13.0 14.2 15.9 17.9 20.6 22.1 24.3 26.7 30.0 14.1 40.6 68.7 103.2 145.6 197.9

Gross Margin 76% 69% 71% 71% 80% 82% 79% 79% 80% 81% 81% 82% 82% 82% 83% 83% 72% 80% 81% 82% 84% 84%Selling and Marketing 2.6 3.7 4.9 6.4 6.8 8.1 8.5 10.0 10.7 11.4 12.3 13.6 13.7 14.3 14.8 15.5 17.6 33.3 48.1 58.3 70.0 89.1Research and Development 2.1 2.5 3.1 4.0 4.4 4.7 5.3 5.8 6.1 6.3 6.6 7.1 7.1 7.4 7.8 8.3 11.8 20.2 26.1 30.5 38.7 46.9General and Administrative 0.7 0.8 0.9 1.1 1.7 2.6 2.5 2.7 3.0 3.3 3.6 3.9 3.9 4.0 4.1 4.3 3.5 9.5 13.8 16.3 20.0 23.4Operating Expenses 5.4 7.1 8.8 11.6 12.9 15.4 16.3 18.5 19.8 21.1 22.5 24.6 24.7 25.7 26.6 28.2 32.9 63.0 88.0 105.2 128.7 159.4Opex Pct 110% 156% 203% 203% 162% 128% 113% 113% 112% 107% 102% 97% 92% 87% 82% 78% 168% 124% 104% 84% 74% 68%

EBITA (1.7) (3.9) (5.7) (7.5) (6.5) (5.5) (4.9) (5.5) (5.6) (5.1) (4.6) (3.9) (2.6) (1.4) 0.1 1.8 (18.8) (22.4) (19.3) (2.0) 16.9 38.5EBITA Margin (33)% (87)% (131)% (132)% (82)% (46)% (34)% (33)% (32)% (26)% (21)% (16)% (10)% (5)% 0% 5% (96)% (44)% (23)% (2)% 10% 16%

Interest Income (expense) 0.1 0.1 0.1 0.4 0.3 1.2 1.5 2.1 2.9 3.0 3.0 2.9 2.9 2.9 2.9 2.9 0.7 5.1 11.8 11.4 14.8 24.8Other IncomePretax Income (1.5) (3.8) (5.7) (7.2) (6.2) (4.4) (3.4) (3.4) (2.7) (2.1) (1.7) (1.0) 0.3 1.5 3.0 4.6 (18.1) (17.3) (7.5) 9.4 31.7 63.3

Taxes 0.0 0.0 (0.1 (0.1 (0.1) (0.6) (1.2) (1.9) 0.0 (0.2) 0.0 (3.8) (12.7) (25.3)Net Income—Operating, Before Amort. (1.5) (3.8) (5.7) (7.2) (6.2) (4.5) (3.5) (3.4) (2.7) (2.1) (1.7) (1.0) 0.2 0.9 1.8 2.8 (18.2) (17.6) (7.5) 5.6 19.0 38.0Non-Cash Compensation Expense 0.0 0.0 0.0 (0.3) (1.0) (1.1) (1.1) (1.0) (0.7) (0.6) (0.6) (0.5) (0.5) (0.4) (0.4) (0.3) (0.3) (4.3) (2.4) (1.6) (0.8) (0.5)

Extraordinary ItemsReported Net Income (1.5) (3.8) (5.7) (7.5) (7.2) (5.7) (4.6) (4.4) (3.4) (2.7) (2.3) (1.5) (0.3) 0.5 1.4 2.5 (18.5) (21.8) (9.9) 4.1 18.3 37.5Earnings per Share

Quarterly Operating $(0.08) $(0.21) $(0.31) $(0.40) $(0.26) $(0.16) $(0.12) $(0.11) $(0.09) $(0.07) $(0.05) $(0.03) $0.01 $0.03 $0.05 $0.08Quarterly Reported $(0.08) $(0.21) $(0.31) $(0.41) $(0.31) $(0.20) $(0.15) $(0.14) $(0.11) $(0.08) $(0.07) $(0.05) $(0.01) $0.01 $0.04 $0.07Trailing Q4 Operating $(0.40) $(0.55) $(0.79) $(1.00) $(1.18) $(1.13) $(0.93) $(0.65) $(0.47) $(0.38) $(0.31) $(0.23) $(0.14) $(0.05) $0.05 $0.16 $(0.97) $(0.62) $(0.23) $0.16 $0.53 $0.96Trailing Q4 Reported $(0.40) $(0.55) $(0.79) $(1.02) $(1.24) $(1.23) $(1.07) $(0.80) $(0.60) $(0.48) $(0.40) $(0.31) $(0.21) $(0.11) $(0.00) $0.12 $(0.99) $(0.77) $(0.31) $0.12 $0.50 $0.94

Average Shares Outstanding 18.2 18.2 18.2 18.2 23.5 28.8 29.8 31.3 31.7 32.1 32.5 32.9 33.4 33.9 34.4 34.9 18.7 28.4 32.3 34.2 36.2 39.7Margin AnalysisRevenue MixLicense 83% 61% 61% 70% 76% 72% 72% 75% 75% 75% 76% 76% 76% 76% 77% 77% 70% 74% 76% 77% 77% 77%Services 17% 39% 39% 30% 24% 28% 28% 25% 25% 25% 24% 24% 24% 24% 23% 23% 30% 26% 24% 23% 23% 23%Revenue Growth Q/QLicense 134% (33% (4)% 49% 51% 44% 20% 17% 9% 12% 12% 15% 7% 10% 10% 12%Services (32)% 114% (4)% 1% 13% 73% 21% 4% 6% 10% 10% 13% 7% 9% 9% 10%Total 67% (8% (4)% 31% 39% 51% 20% 13% 8% 12% 12% 15% 7% 10% 10% 12%Revenue Growth Y/YLicense 378% 25% (13% 126% 46% 211% 291% 206% 121% 71% 59% 57% 54% 52% 49% 45% 71% 175% 71% 49% 40% 35%Services (15)% 123% 100% 41% 133% 89% 137% 144% 130% 46% 33% 45% 46% 44% 42% 39% 57% 124% 54% 43% 37% 33%Total 171% 50% 11% 92% 60% 164% 231% 187% 123% 64% 52% 54% 52% 50% 47% 43% 66% 160% 67% 48% 39% 35%

License 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 58%Services (44% 21% 25% 4% 16% 36% 24% 20% 22% 23% 24% 26% 26% 27% 27% 27% 8% 24% 24% 27% 30% 18%

Gross Margin 76% 69% 71% 71% 80% 82% 79% 79% 80% 81% 81% 82% 82% 82% 83% 83% 72% 80% 81% 82% 84% 84%Selling and Marketing 52% 82% 112% 113% 85% 67% 59% 61% 61% 58% 56% 54% 51% 49% 46% 43% 90% 66% 57% 47% 40% 38%Research and Development 43% 56% 71% 71% 55% 39% 37% 35% 35% 32% 30% 28% 26% 25% 24% 23% 60% 40% 31% 24% 22% 20%General and Administrative 14% 19% 20% 20% 21% 22% 17% 16% 17% 17% 16% 15% 15% 14% 13% 12% 18% 19% 16% 13% 11% 10%

Operating Expenses 110% 156% 203% 203% 162% 128% 113% 113% 112% 107% 102% 97% 92% 87% 82% 78% 168% 124% 104% 84% 74% 68%Operating Margin (33)% (87)% (131)% (132)% (82)% (46)% (34)% (33)% (32)% (26)% (21)% (16)% (10)% (5)% 0% 5% (96)% (44)% (23)% (2)% 10% 16%Pretax Margin (31)% (84)% (130)% (126)% (78)% (37)% (23)% (21)% (15)% (11)% (8)% (4)% 1% 5% 9% 13% (93)% (34)% (9)% 7% 18% 27%

Tax Margin 0% 0% 0% 0% 0% (3)% (3)% 0% 0% 0% 0% 0% (40)% (40)% (40)% (40)% 0% 1% 0% (40)% (40)% (40)%Net Income Margin (31)% (84)% (130)% (126)% (78)% (38)% (24)% (21)% (15)% (11)% (8)% (4)% 1% 3% 5% 8% (93)% (35)% (9)% 4% 11% 16%


Figure 28: NUANCE COMMUNICATIONS, INC.—QUARTERLY BALANCE SHEET ($ in millions)

2000E 2001E 2002EFY December Q1A Q2A Q3A Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Uses of Capital

Operating Cash $0.635 $0.960 $1.157 $1.311 $1.416 $1.579 $1.761 $2.016 $2.157 $2.365 $2.593 $2.893Trade Receivables 6.270 9.810 12.555 14.417 15.576 17.368 19.367 22.178 23.730 26.018 28.528 31.818Prepaid Expenses and Other 2.939 4.726 148.480 4.915 5.310 5.921 6.602 7.561 8.090 8.870 9.725 10.847Total Current Assets 9.844 15.496 162.192 20.642 22.302 24.867 27.729 31.755 33.978 37.254 40.847 45.558

Accounts Payable 3.589 2.775 2.512 3.932 4.248 4.737 5.282 6.049 6.472 7.096 7.780 8.678Accrued Liabilities 6.168 10.915 12.554 14.417 15.576 17.368 19.367 22.178 23.730 26.018 28.528 31.818Deferred Revenue 3.353 6.724 7.073 7.208 7.788 8.684 9.683 11.089 11.865 13.009 14.264 15.909Total Current Liabilities 13.11 20.414 22.139 25.557 27.612 30.788 34.332 39.315 42.067 46.124 50.572 56.405

Net Trade Working Capital (3.266) (4.918) 140.053 (4.915) (5.310) (5.921) (6.602) (7.561) (8.090) (8.870) (9.725) (10.847)

Net PP&E 5.449 7.095 8.946 9.829 10.620 11.842 12.324 14.113 15.101 15.375 16.857 18.802Other Assets 0.536 11.61 11.975 12.215 12.459 12.708 12.962 13.221 13.486 13.756 14.031 14.311

Total Operating Capital 2.719 13.787 160.974 17.129 17.769 18.629 18.684 19.774 20.497 20.260 21.163 22.266Excess Cash 35.726 99.814 92.413 231.893 227.880 224.315 221.986 219.357 218.346 219.043 219.554 220.922Total Invested Capital $38.445 $113.601 $253.387 $249.022 $245.649 $242.944 $240.670 $239.130 $238.843 $239.303 $240.717 $243.188

Sources of Capital

Short-Term Debt 0.919 0.323 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278Long-Term Debt 1.167Total Non-Equity Capital 2.086 0.323 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278 0.278

Equity 36.359 113.278 253.109 248.744 245.371 242.666 240.392 238.852 238.565 239.025 240.439 242.910

Total Capital $38.445 $113.601 $253.387 $249.022 $245.649 $242.944 $240.670 $239.130 $238.843 $239.303 $240.717 $243.188

Summary AnalysisCash $36.36 $100.77 $93.57 $233.20 $229.30 $225.89 $223.75 $221.37 $220.50 $221.41 $222.15 $223.82Cash/Share $1.55 $3.50 $3.14 $7.44 $7.22 $7.03 $6.87 $6.72 $6.59 $6.52 $6.45 $6.40

% Annualized Sales% Equity

(a) Cash includes $34.782 in other receivables due from underwriters following the IPO.


Figure 29: NUANCE COMMUNICATIONS, INC.—RETURN ON INVESTMENT CAPITAL ($ in millions)

2000E 2001E 2002EFY December Q1A Q2A Q3A Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Earnings Before Interest and Tax (EBIT) $(7.5) $(6.7) $(6.1) $(6.5) $(6.3) $(5.7) $(5.2) $(4.4) $(3.0) $(1.8) $(0.2) $1.5

Tax Provision 0.0 0.1 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.6 1.2 1.9+Shield From Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

- Adjusted Taxes 0.0 0.2 0.1 0.0 0.0 0.0 0.0 0.0 0.1 0.6 1.2 1.9

+ Increase in Capitalized R&D 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0+ Amortization of Goodwill 1.0 1.1 1.1 1.0 0.7 0.6 0.6 0.5 0.5 0.4 0.4 0.3

Net Operating Profit After Tax (NOPAT) (6.5) (5.7) (5.0) (5.5) (5.6) (5.1) (4.6) (3.9) (2.7) (2.0) (1.1) (0.1)

Annualized NOPAT (26.1) (22.9) (20.1) (21.9) (22.5) (20.5) (18.5) (15.7) (10.8) (7.9) (4.3) (0.2)TTM NOPAT (23.7) (25.5) (24.8) (22.8) (21.9) (21.2) (20.8) (19.3) (16.4) (13.2) (9.7) (5.8)Incremental NOPAT 1.0 0.8 0.7 (0.4) (0.1) 0.5 0.5 0.7 1.2 0.7 0.9 1.0

Invested Capital 38.4 113.6 253.4 249.0 245.6 242.9 240.7 239.1 238.8 239.3 240.7 243.2Excess Cash 35.7 99.8 92.4 231.9 227.9 224.3 222.0 219.4 218.3 219.0 219.6 220.9

Invested Capital in Operations 2.7 13.8 161.0 17.1 17.8 18.6 18.7 19.8 20.5 20.3 21.2 22.3Incremental Invested Capital in Operations 4.4 11.1 147.2 (143.8) 0.6 0.9 0.1 1.1 0.7 (0.2) 0.9 1.1

Annualized Quarterly ROIC (959)% (166)% (13)% (128)% (127)% (110)% (99)% (79)% (53)% (39)% (20)% (1)%TTM ROIC (872)% (185)% (15)% (133)% (123)% (114)% (112)% (98)% (80)% (65)% (46)% (26)%TTM Return On Average Invested Cap. (4,408)% (309)% (28)% (26)% (125)% (117)% (112)% (100)% (81)% (65)% (47)% (27)%Incremental ROIC 23% 7% 0% 0% (23)% 59% 869% 65% 170% (305)% 100% 91%


Figure 30: NUANCE COMMUNICATIONS, INC.—CASH FLOW STATEMENT ($ in millions)

2000E 2001E 2002EFY December Q1A Q2A Q3A Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Operating Sources

Earnings $(7.2) $(5.7) $(4.6) $(4.4) $(3.4) $(2.7) $(2.3) $(1.5) $(0.3) $0.5 $1.4 $2.5DepreciationDeferred Taxes/Other

Total (7.2) (5.7) (4.6) (4.4) (3.4) (2.7) (2.3) (1.5) (0.3) 0.5 1.4 2.5

Operating RequirementsNet Trade 2.8 (1.7) 145.0 (145.0) (0.4) (0.6) (0.7) (1.0) (0.5) (0.8) (0.9) (1.1)Capital OutlaysSoftware DevelopmentOther 1.6 12.7 2.2 1.1 1.0 1.5 0.7 2.0 1.3 0.5 1.8 2.2

Total 4.4 11.1 147.2 (143.8) 0.6 0.9 0.1 1.1 0.7 (0.2 0.9 1.1

Funds Produced(Consumed) (11.6) (16.7) (151.8) 139.5 (4.0) (3.6) (2.3) (2.6) (1.0) 0.7 0.5 1.4Less: DividendsNet Funds Produced(Consumed) (11.6) (16.7) (151.8) 139.5 (4.0) (3.6) (2.3) (2.6) (1.0) 0.7 0.5 1.4

Increase in Excess Cash (5.2) 64.1 (7.4) 139.5 (4.0) (3.6) (2.3) (2.6) (1.0) 0.7 0.5 1.4

Net Surplus (6.3) (80.8) (144.4) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Sources of External CapitalShort-Term Debt (0.1) (0.6) 0.0 0 0 0 0 0 0 0 0 0Long-Term Debt (0.2) (1.2) 0 0 0 0 0 0 0 0 0 0Equity 6.6 82.6 144.4 0 0 0 0 0 0 0 0 0

Total Sources 6.3 80.8 144.4 0 0 0 0 0 0 0 0 0

Cash Flow SummaryQuarter Start Cash $41.4 $36.4 $100.8 $93.6 $233.2 $229.3 $225.9 $223.7 $221.4 $220.5 $221.4 $222.1

+ Funds Produced (consumed) by Operations (11.6) (16.7) (151.8) 139.5 (4.0) (3.6) (2.3) (2.6) (1.0) 0.7 0.5 1.4+ Increase in Operating Cash 0.2 0.3 0.2 0.2 0.1 0.2 0.2 0.3 0.1 0.2 0.2 0.3= Net Funds Produced by Operations (11.4) (16.4) (151.6) 139.6 (3.9) (3.4) (2.1) (2.4) (0.9) 0.9 0.7 1.7

+ Funds Produced by Financing 6.3 80.8 144.4 0 0 0 0 0 0 0 0 0- Funds Used by Dividends 0 0 0 0 0 0 0 0 0 0 0 0

Quarter End Cash 36.4 100.8 93.6 233.2 229.3 225.9 223.7 221.4 220.5 221.4 222.1 223.8

Quarterly Increase in Cash (5.1) 64.4 (7.2) 139.6 (3.9) (3.4) (2.1) (2.4) (0.9) 0.9 0.7 1.7Increase in Cash/Share $(0.22) $2.24 $(0.24) $4.45 $(0.12) $(0.11) $(0.07) $(0.07) $(0.03) $0.03 $0.02 $0.05Funds Produced by Operations/Share $(0.48) $(0.57 $(5.09) $4.45 $(0.12) $(0.11) $(0.07) $(0.07) $(0.03) $0.03 $0.02 $0.05



January 9, 2001

SpeechWorks International Inc.SPWX $20.13


Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 ERating: New Buy EPS:EPS 2001E: New $(0.66) 1Q $(0.29) $(0.20) $(0.12)EPS 2002E: New $(0.28) 2Q $(0.29) $(0.18) $(0.10)Rev 2001E: New $58.2 3Q $(0.20) $(0.15) $(0.06)Rev 2002E: New $101.5 4Q $(0.20) $(0.13) $0.00

Year $(0.98) $(0.66) $(0.28)52-Week Range: $109–18 P/E — NM NMFully Diluted Shares Outstanding (MM): 27.7Market Cap (MM): $557.6Average Daily Volume (000): NABook Value/Share 12/99: $4.97 Revenues (MM): 2000 2001 E 2002 E3-Year Secular Growth Rate: 100.00% 1Q $5.1 $11.1 $20.4Dividend/Yield: None/None 2Q $6.0 $13.4 $23.6Price/Book Value 12/99: 4.1x 3Q $8.6 $15.6 $26.6Net Cash 12/99 (MM): $118.6 4Q $9.6 $18.1 $30.9Net Cash/Share 12/99: $4.29 Year $29.3 $58.2 $101.5ROIC 2000E: (138.3)% Eqty Mkt/Rev — 9.6x 5.5x

• Voice Interface Solutions Provide a Human Touch to Data Applications. Voice infrastructuresolutions automate speech, the natural human interface to obtain customer service, place anorder or gain access to Web content. These solutions translate speech into text and data (andtext into speech), so that users benefit from the true convergence of voice with data.

• Voice Solutions Are an Emerging High-Growth Market Forecast to Reach $5–10 billion by2005. The market for voice solutions including infrastructure, applications and services isestimated at approximately $1 billion and forecast to reach $5–10 billion worldwide by 2005. Weexpect SpeechWorks and competitors Nuance (NUAN $29.50) and Philips to capture the lion’sshare of this opportunity. We believe demand for SpeechWorks and the voice solutions market isa direct play on several major growth trends:

− Call Management and the rise in voice solutions to replace expensive operator, touch-toneand/or PBX solutions;

− CRM—Rising demand for voice automated call center and customer relationshipmanagement (CRM) solutions to reduce costs, improve customer satisfaction and loyalty;

− Voice Web Interfaces for Wireless Data navigation and use of special purpose voiceportals to access information via wireline and wireless phones; and

− mCommerce and the increasing use of telephone to initiate transactions, check orders andinventories and other eBusiness services.

• Approximately 200 Deployments by Blue-Chip Customers Attest to the StrongPerformance of SpeechWorks’ Solutions. SpeechWorks’ systems feature 90%-plus accuracyand even higher transaction completion rates of 97–98%. We credit these and ongoingperformance gains with key wins at carriers, enterprises and Internet providers including AOL,Federal Express, MCI WorldCom, United Airlines and Yahoo!.


• SpeechWorks, along with its major competitors, Nuance and Philips, dominates thefragmented market for speech recognition solutions where barriers to entry are high.Advanced telephony-oriented speech-recognition engines include a self-learning feature thatensures these vendors realize exponential returns to their growth. SpeechWorks’ aptly namedSmartRecognizer gets “smarter” the more it is used, because the statistics in its speechrecognition engine have more examples to draw from. Thus, the performance gap betweenSpeechWorks and would-be market entrants widens with each product sale.

• Diverse Product Portfolio Offers Superior Visibility and Excellent Profit Potential.SpeechWorks is uniquely positioned with a soup-to-nuts customer offering, extending itsexpertise in core speech recognition to a suite of software infrastructure, applications andprofessional services. This rich product mix provides SpeechWorks with approximately 70%average visibility entering each quarter (though current backlog is somewhat higher). As thecompany adds complementary technologies and applications to its portfolio (i.e., Speechify,SpeechSite) and expands globally with third-party distribution, it should see its mix shift towardhigher-margin software. We forecast software grows from 52% of its mix in 2000 to 65% by2003. This favorable mix shift, coupled with ongoing scale economies, should meanconsiderable margin expansion during the next several years and produce breakeven results byQ4:02, if not sooner.

• Initiating Coverage of SpeechWorks with a Buy Rating. We forecast SpeechWorks willachieve average annual growth of at least 75% over the next three years. Given our growth andmargin expansion expectations, we expect it to reduce its losses throughout 2001 and 2002 andreport at least $0.10 in 2003 and $0.50 in 2004. At $20.13, the stock is trading at approximately40x our 2004 forecast and 10x 2001 revenue projections. Near term, we believe the stock couldcontinue to come under pressure as it absorbs the end of a lockup January 29. Thoughapproximately 18 million shares are affected, we believe the stock is held largely held by officerssubject to volume restrictions (5 million+/-) and VCs (11 million) suggesting to us that perhaps 1–3million shares could actually reach the market. In light of these issues and current valuations, ourrecommendation is only oriented toward longer-term investors interested in a pure play on thespectacular long-term opportunity presented by the voice market—approximately $5–10 billion.We believe SpeechWorks is well positioned to join a handful of competitors, including Nuanceand Philips, to dominate this market capturing 70–85% share.

Investment Summary

SpeechWorks is positioned at the forefront of an emerging high-growth market to automate voiceinterfaces and applications.

We forecast at least 75% average annual revenue growth will result from the followingcompany growth strategies:

1. Moving from a single product, core speech recognition, to a diversified offering. Althoughwe believe the SpeechWorks 6 platform currently generates the lion’s share of its revenues(75%-plus), we expect newer product offerings to add significant upside to license sales growthover the next few years.

• Text-to-speech infrastructure opens a new market for SpeechWorks as of thisquarter. In June, SpeechWorks entered into an agreement with AT&T to license itstext-to-speech software in exchange for 1.045 million shares. Since then,SpeechWorks has developed Speechify (a text-to-speech solution based on thistechnology), with initial revenues expected in Q4:00 from AOL, Yahoo! and 15–20others. AT&T plans to jointly market Speechify to its business units. In December,


SpeechWorks agreed to acquire Eloquent for $17 million in stock and cash to expandthe richness and geographic reach of its text-to-speech offering.

• Speaker verification is now part of the SpeechWorks bundled offering.SpeechWorks’ seamlessly bundles third-party verification solutions with its otherofferings on an as-needed basis. Transparent to the customer, this software providesadditional security to speech applications by automatically verifying the identity of theuser by their voice. A small market at present, we expect greater use of speakerverification to come as voice is increasingly used in mCommerce and eBusinessapplications.

• Introducing turnkey applications to expand market acceptance of speechtechnology to a new group of customers. In addition to providing a core speechinfrastructure technology (such as its SpeechWorks 6.5 recognition engine, toolset anddialog modules), SpeechWorks offers prepackaged applications to companies lackingavailable resources internally to develop or design custom applications. The completeturnkey solution (bundling software, hardware and services) is also popular with largerorganizations seeking to leverage SpeechWorks’ design and implementation experience.The first of these applications is SpeechSite, a customer service application, should befollowed by additional introductions of packaged applications in 2001.

2. Extending market leadership via advanced user-interface technology. We believeSpeechWorks is relying upon a combination of internal and third-party development (viapartnership and acquisition) to continue to improve the performance of its recognition engine. Amajor focus is the user interface, which is expected to become “more human” by incorporatinggreater advances in natural language, conversational vocabulary and barge-in capabilities thanwhat is currently available from SpeechWorks and other market leaders. Increased performanceshould continue to expand customer acceptance of speech applications and raise the bar forcompetitors. By “humanizing” the voice interface, SpeechWorks hopes to gain the ease of useand user friendliness necessary for its solutions to reach the massive 2.5 billion wireline andwireless access devices forecast by 2003 with its systems.

3. Increasing sales to existing customers as they expand the number of speech applicationswithin their organizations. Most customers have deployed just one or two SpeechWorkssolutions—such as call routing—within one or two departments suggesting a large opportunity tosell additional solutions to current customers. United Airlines and Yahoo! represent two suchopportunities. United Airlines has deployed the SpeechWorks 6 recognition platform as a callcenter replacement to respond to inquiries regarding flight departure times and Yahoo! hasdeployed its Speechify text-to-speech technology to read e-mails to its users. Both clients couldautomate additional customer service applications with voice systems or add voice interfaces forWeb content delivery.

In addition to its upsale opportunity, SpeechWorks also enjoys usage-based growth fromexisting clients. SpeechWorks charges a per-port license fee of $500–1,500, with volumediscounts. Customer port requirements depend on the richness of the applications. Forinstance, a single port may be able to support a few hundred subscribers for a singleapplication, but depending on additional applications used, the port’s subscriber capacity maybe reduced by as much as 50–80%. This pricing model enables Speech Works to benefit asusage builds for speech applications requiring the user to purchase additional ports. In someinstances (i.e., AOL), SpeechWorks benefits from voice application revenue-sharingagreements with its clients—a practice we suspect will supplement per-port pricing in manyfuture portal or carrier deals.


4. Ongoing international expansion as SpeechWorks bolsters its multi-language and multi-currency support. International sales represented 2.6% of 1999 and has already improved to14% of Q3 revenues. The company targets 20% of its mix from international customers over thenext year or two. It now has more than 45 non-U.S.-based clients and partners in Europe, LatinAmerica and Asia, and as of Q3 supported more than 15 languages. With support for threeadditional languages due shortly—Japanese, Korean, Cantonese—we believe the company willhave amassed the technology required to reach the critical mass of wireline and wirelesstelephony users globally.

5. Expanding market reach through global distribution.

• Increased channel partners should benefit growth. SpeechWorks has been aggressivelyexpanding the number and scope of its partnerships as it strives to market its softwareglobally. It is increasing its presence in the call center replacement market with new VRU(voice processing response unit) equipment vendor partnerships. Recently it supplementedexisting relationships with InterVoice-Brite and Aspect (combined, 39% of Q3 revenues) witha reseller agreement with Avaya. Formerly the Enterprise Business Systems Group ofLucent, Avaya brings SpeechWorks an entrée to 90% of the Fortune 500. However, webelieve the influence of VRU vendors has diminished as the market opportunity for voice-interface solutions has expanded beyond the replacement of existing call centers withembedded VRU equipment. Thus, SpeechWorks has broadened the scope of its marketingand distribution agreements to include more than 55 partners including carriers (AT&T,NetByTel and Net2Phonea,b), ASPs (SkyFlow, General Magic, Nortel), wireless data softwarevendors (EveryPath, MapQuest.com, Tsys), systems integrators (Systex, Telera, Unisys)and other equipment vendors (Avaya, Active Voice/Cisco). As of Q3, channel partnersrepresented 46% of SpeechWorks sales, primarily due to a major order with First UnionBank with its partner InterVoice-Brite. This represented a large increase from the 14% of itsrevenues derived from partners in 1999 and 28% in Q2.

Figure 31: SPEECHWORKS INTERNATIONAL INC.—REVENUE MIX BY DISTRIBUTION CHANNEL

Percent of MixChannel 1999 2000 2001E

CAGR1999–2001E

Direct 86% 67% 59% 68%Indirect 14% 33% 41% 250%Total 100% 100% 100% 104%


• Raising direct sales effort on a global basis. As of Q3, SpeechWorks had 34 direct salesrepresentatives. We expect the company to grow this force to at least 40 as of Q4:00 and 60strong by year-end 2001. Often, the company’s direct sales effort is accompanied bymarketing from outsourcers or ASPs, VRU vendors, software platform vendors, professionalservices organizations and carriers. Its direct sales approach, coupled with directimplementation experience, has enabled SpeechWorks to market strong performance acrossa heterogeneous base of equipment, applications and industries—a key to winning dealswith AOL and others.

6. Leveraging value-added services to ensure a consistent high-performance offeringregardless of application, industry or geography. SpeechWorks’ unique end-to-end offeringfeatures software infrastructure, applications and a professional services group focused onapplication development, user-interface design, systems integration and project management.The strategic value of its services group is its ability to expand market acceptance of voice-interface solutions. We believe its development and deployment experience has been a major


asset in the company’s pursuit of new business, enabling the company to promise potentialcustomers reduced technology risk and superior time to market. SpeechWorks’ services teamalso ensures its user interface is common across all SpeechWorks applications—regardless ofwhether they are custom developed or designed by SpeechWorks. Because its voice interface isthe same, regardless of application, geography or industry, SpeechWorks-enabled applicationsshould be dramatically more usable as users gain familiarity with the systems each time theyencounter them. In contrast, competitive speech applications find their interface variesdepending on who designed or implemented the application.

SpeechWorks, along with its major competitors, Nuance and Philips, essentially dominatethis fragmented market where barriers to entry are high. These speech-recognition enginesbenefit from a self-learning feature that ensures exponential performance gains the more they areused. The statistical algorithms they use are better at interpreting words, grammar and accents themore examples they encounter. Approximately 200 deployments in key early adopter markets bySpeechWorks—banking, brokerage, communication services and Internet—establishes a barrier toentry for future competitors.

The difference between Nuance and its nearest competitor, SpeechWorks, comes down tostrategy. We believe the key differentiating factor between Nuance and SpeechWorks is thestrategy with which they respectively offer their technology. As it stands presently, Nuance has atechnology-driven focus, with a partnering philosophy for distribution and professional services. Thisis evidenced in the financial results of Nuance, which should derive two-thirds of its revenues fromindirect sales channels and approximately 75% from software sales in 2000. Nuance has chosen topartner with a wide arrange of professional services, IVR vendors and others to provide widerdistribution and a more complete end-to-end solution for its customers. In contrast to this model isSpeechWorks, which has chosen to approach the market with a more complete internal end-to-endoffering, balancing its technology sales with a suite of applications and professional services. This isevidenced by SpeechWorks financial results that indicate 77% of revenues should be derived fromdirect sales and 39% from professional services for 2000. We believe these distinct models areblurring somewhat as both companies seek accelerated growth. SpeechWorks is building strongthird-party relationships with equipment, software and service vendors as it strives to growinternationally. At the same time, we believe Nuance is building its internal services to helpaccelerate market acceptance for innovative new voice applications.

Attractive business model should mean SpeechWorks experiences high returns on itsgrowth. SpeechWorks is uniquely positioned with a soup-to-nuts customer offering, extending itsexpertise in core speech recognition to a suite of software infrastructure, applications andprofessional services. This rich product mix provides SpeechWorks with approximately 70% visibilityentering each quarter, though we estimate the current backlog may measure as much as twoquarters. As the company adds complementary technologies and applications to its portfolio (i.e.,Speechify, SpeechSite) and expands globally with third-party distribution, it should see its mix shifttoward higher-margin software. We forecast software grows from 52% of its mix in 2000 to 65% by2003 generating average annual growth of 75%. This favorable mix shift, coupled with ongoing scaleeconomies, should mean considerable margin expansion during the next several years and producebreakeven results by Q4:02, if not sooner. We forecast EPS of $(0.66) in 2001, $(0.28) in 2002 andat least $0.10 by 2003 and $0.50 by 2004. Given these forecasts, we believe SpeechWorks canimprove its return on equity from (16)% Q3:00 to 13% by the fourth quarter of 2003 (5% for the fullyear). Return on invested capital of (138)% for Q3:00 should improve to approximately 34% byQ4:03 (8% for the full year).


Valuation

SpeechWorks recent stock performance has been negative, along with the market, decliningsignificantly from its high set in August.

Figure 32: SPEECHWORKS INTERNATIONAL INC.—VOICE SOLUTION STOCK PERFORMANCE

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At $20, SpeechWorks’ stock is trading at approximately 40x our 2004 forecast and 10x next year’srevenue projections. At current levels, with a lockup ending January 29 (1–3 million of 19 millionshares should be traded), we recommend the stock only for longer-term investors interested in thespectacular opportunity presented by the voice market—approximately $5–10 billion. We believeSpeechWorks is well positioned to join a handful of competitors, including Nuance and Philips, todominate this market capturing 70–85% share on a combined basis. We believe SpeechWorks’leading voice technology, attractive business model and solid customer base should position it to enjoysubstantial upside to our projections as demand for call center replacement, customer relationshipmanagement, call management, wireless Web navigation and mCommerce services accelerate.


Figure 33: SPEECHWORKS INTERNATIONAL INC.—COMPARABLE COMPANIES TABLE(in millions, except per share data)

% ∆∆∆∆ From Market Enterprise Mkt Val/Rev Ent Mkt Val/RevTicker 1/8/01 52-Week Hi Shares Value Value 2001E 2002E 2001E 2002E

Nuance NUAN $29.50 (84)% 31.3 925 $831 11x 7x 10x 7xSpeechWorks SPWX $20.13 (81)% 29.8 600 $480 10x 6x 8x 5x

Average 11x 7x 9x 6x

Price toRevenues (MM) Growth EPS P/E Net Cash/ Net Cash/ Price to Bk

Ticker C2000E C2001E C2002E 00/01 01/02 C2000E C2001E C2002E C2001E C2002E Share /\Share Val/ ShareNuance NUAN 50.8 84.6 125.1 67% 48% $(0.62) $(0.23) $0.16 NM 184x 3.13 9x 3xSpeechWorks SPWX 29.3 58.2 101.5 99% 74% $(0.98) $(0.66) $(0.28) NM NM 4.29 5x 4x

Average 83% 61% 7x 4x

Source: Bridge, company reports and Robertson Stephens estimates.

Fourth-Quarter Outlook

We expect AOL and Speechify to contribute to quarterly results for the first time this quarter. As aresult, we anticipate a strong sequential pickup in direct sales from $4.6 million in September to $6.5million. Channel revenues should decline sequentially due to tough comparisons with a largecontract recognized in the third quarter from InterVoice-Brite. In total, we forecast at least $9.6million up 11% from $8.6 million for third-quarter revenues. Gross margins are expected to declinefrom 66% to 62% due to this mix shift (which could drive software licenses down from 56% to 52%).With operating expenses due to rise just 5% sequentially, we believe EBITA margins could improveby 4 points to (74)%. As a result, the company should report a loss better than our $(0.20) forecast.

Company Highlights

SpeechWorks International is a leading provider of a suite of speech-recognition technologiesdesigned to voice enable applications for telcos, enterprises and Internet customers. The companyuses a combination of direct and third-party distribution to market an end-to-end solution of voiceinfrastructure (speech recognition, natural language understanding and text-to-speech technologies),applications and professional services. The company was founded in 1994 by a group fromMassachusetts Institute of Technology’s (MIT) Spoken Language Systems Group and is based inBoston, Massachusetts.

ProductsSpeechWorks offers two main infrastructure solutions to enable telephony-based voice applications.

1. SpeechWorks 6.5. A complete end-to-end software platform and toolset enabling end users tobuild and deploy custom applications utilizing advanced speech recognition. Its latest version,SpeechWorks 6.5, was released in June and supports multiple languages (15, with 3 newlanguages pending) and rapid time to market. Typical applications deployed with SpeechWorks6.5 include: travel (airline and agency), banking and brokerage, health care, messaging andeCommerce. The main components of the platform are:

• SMARTRecognizer. The core engine of the SpeechWorks 6 platform. The speaker-independent solution recognizes more than 65,000 words at a time and supportscustom vocabularies, benefiting from a self-learning feedback loop. The platform alsosupports voice recognition during continues speech and barge-in scenarios.


• DialogModules. A SpeechWorks innovation, DialogModules are pre-packagedsoftware building blocks to hasten the development and deployment of speechapplications. DialogModules integrate and personalize SpeechWorks capabilitiesquickly into applications. The modules were initially designed to handle rudimentarytasks such as a capturing a date or a yes/no response and now include: AddressDialogModule, Verification DialogModule and natural language enhancements. As ofQ3, SpeechWorks had 17 DialogModules available to handle Address DailogModulelower level takes in application development. Mid-September, the company unveiledSpeechSecure, a new module to provide security to callers that access personalinformation and conduct commerce via the phone. Offered with the SpeechWorks 6platform, the DialogModule is also available for simple integration into third-partyspeaker verification solutions.

• SpeechWorks Tuning Tools. Operating and tuning tools are available to clients toevaluate and improve the performance of deployed applications based on actual callerexperiences. These graphical reporting and analysis tools enable users to achieve 90%-plus performance. SpeechWorks provides application developers a detailed view of howthe application is being used and how it is performing for end users. For example, afterreviewing the usage data the organization can tune the system to recognize “yeah” as“yes.” Data analysis tools permit rapid identification and resolution of problems, whilereports enable firms to track and monitor the efficiency of the user interface.

• Automatic Adaption Tools. SpeechWorks uniquely integrates its adaption tools rightinto its core speech recognition engine. These tools automatically adapt the speechrecognition engine to the acoustic, pronunciation and language models encountered asthe application is used more frequently.

2. Complementary Technologies. Increasingly, these emerging technologies are bundled withspeech-recognition solutions in applications but do not generally influence speech-enginepurchases.

• Speechify Text-to-Speech (TTS). Based on technology licensed from AT&T Labs,Speechify generates synthetic computerized speech from text sources such as e-mail, news,reports or a database. Speechify was designed to speak an open-ended list of words in astructured environment. For example, it will confirm a data field or read you the weather. OnDecember 21, SpeechWorks agreed to acquire Eloquent Technology for $5.25 million incash and 300,000 shares—approximately $17 million. The acquisition adds 12 languages toSpeechWorks’ text-to-speech offering.

• Speaker Verification. Speaker verification solutions identify a user based on the caller’svoice. These solutions increase the security of voice applications above and beyond spokenaccount numbers or PINs. Available since September, SpeechWorks OEMs verification fromthird parties such as T-NETIX and bundles these solutions with its SpeechWorks 6 platformon demand.

• In addition, SpeechWorks has leveraged its strength in enabling infrastructure to severalapplications.


• SpeechSite Applications. Based on the SpeechWorks 6 platform, SpeechSite is a turnkeycustomer service application based on SpeechWorks’ DialogModules including the software,equipment and services needed to deploy an automated speech solution in under twoweeks. Typical SpeechSite deployments perform:

− Call routing and management, answering and directing telephone calls based onvocal commands and

− Information retrieval, or anytime, anywhere access to information such as news,HR, contacts or directions.

• SpeechSpot. SpeechWorks has designed a speech-based advertising placement program.It is the voice market’s answer to banner advertisements on today’s graphical Web sites.

• Open Speech Web Initiative. Introduced in the third quarter, SpeechWorks’ Voice XMLbrowser (an emerging standard) allows users to connect a variety of speech enabled Websites so that users can easily navigate among them.

ServicesIn addition to marketing its packaged software solutions, development tools and applications,SpeechWorks has an internal professional services organization (85 professionals) performingapplication development, systems integration, user-interface design and project management.Targeted at raising marketwide adoption of speech-enabled solutions, it focuses on:

• Widening customer buy-in through product education;

• Improving clients’ time to market;

• Increasing return on investment through shared best practices; and,

• More focused application development targeted on clients’ needs as a result of engineerings’exposure to client activities.

With major improvements in accuracy behind it (90%-plus accuracy) and solid integration with mostmajor VRU vendors, recent emphasis is on customizing client applications to meet more exactspecification and faster implementations.

MarketsThe communications market promises the fastest growth. Approximately 25% of revenues, webelieve the rapid growth of voice infrastructure in the telco market could mean this accounts for 35–45% of total revenues over the next 2–3 years. Already, SpeechWorks has captured key contractswith AT&T, MCI WorldCom and Bell South. SpeechWorks’ solutions allow carriers to offer severalbenefits to end users, including voice activated dialing, spoken access to e-mail and, perhaps mostnotably, they allow carriers to create voice portals for easier browsing on wireless devices with smallscreen and tedious key-in requirements. Coupled with the boom in wireless data services, we expectvoice-enabling technologies to become a key part of wireless carriers’ strategy to raise subscriberrevenues and improve customer retention.

Enterprises represent the largest consumers of speech-recognition technology. Enterpriserevenues have traditionally been SpeechWorks’ strongest customer base, with the segmentaccounting for approximately two-thirds of total revenues. We view enterprises as one of the majorbeneficiaries of voice technology, as it stands to not only improve customer service (automating callcenters and customer relationship management solutions), but also dramatically reduces associatedcosts. These systems have been proven to reduce call center costs by up to 90%—turning an agent-supported call that could cost $1.00 to $15.00 into a voice-activated customer service call that costs


only $0.10 to $0.85. This cost reduction is achieved through more efficient handling of calls, loweroverhead costs and lower per call costs. Our own analysis demonstrates an average per call savingsof $0.86 over a four-year period, with an agent-assisting call averaging $0.95 and a speech-enabledcall averaging only $0.09.

The Internet represents an emerging growth opportunity, buoyed near term by recentagreements with AOL and Yahoo!. Internet and Internet-related companies currently representless than 15% of the mix, but we believe long-term growth prospects are excellent as existing Webportals (i.e., AOL, Yahoo!, HeyAnita) begin to capitalize on the potential of the “voice Web.” UtilizingSpeechWorks’ solutions, Internet companies may offer end users access to Web content, e-mail andvCommerce (Voice Commerce) from any wired or wireless phone. We anticipate a surge in Internet-related revenues as current customers begin to deploy services.

CustomersSpeechWorks claims more than 170 customers that have purchased more than $50,000 ofsoftware/services directly or through retailers and many others in trial.


Figure 34: SPEECHWORKS INTERNATIONAL INC.—CUSTOMER OVERVIEW

CommunicationService Providers

Web Content/Applications Enterprise

>25% Revenues <15% Revenues 60%+/- RevenuesWireline:• BellSouth• MCI WorldCom

Voice Portals (Wireless/WirelineAccess):• AOL• AudioPoint, Inc.• HeyAnita.com• Quack.com/AOL• Yahoo!

Technology/Manufacturing:• Apple Computer• Aspect Communications• CTL, Inc.• Dialogic/Intel• Hewlett-Packard• InterVoice-Brite• MAXXAR Corp.• Nortel Networks• Palm• Universal Electronics

Wireless:• Bell South• CellularOne• SingTel Mobile

Wireless Data Applications:• Everypath• MapQuest.com• XYPOINT/Tsys

Banking/Brokerage:• Bank United• Bidwell & Company• Chase H&Q• CIBC• Citigroup• DLJ Direct• E*Trade• First Tennessee• First Union Nat’l Bank• Fiserv Securities• Hyundai Securities• New York Life Securities• NVest Securities• Singapore Stock Exchange• StockTrade• Taiwan MasterLink Securities• TD Waterhouse

Internet:• AOL• E-Plus• NEXTLINK Interactive

Wireline Data Applications:• Anyday.com• eJiva• foodline.com• Hey Software• NetByTel.com• Price Interactive• Synapse.com

Travel:• AirTran Airways• Amtrak• Continental Airlines• United Airlines

Other:• Energis

Other:• Federal Express

Other:• Guardian Life Insurance• McKesson HBOC• Stop & Shop, AHOLD/USA


Strategic Relationships and PartnershipsAT&T. In June, SpeechWorks signed a five-year royalty-free non-exclusive agreement with AT&T todevelop, license and sell speech products using AT&T’s speech technology (text-to-speech, humanvoice processing, natural language understanding and large vocabulary recognition). AT&T hasagreed to co-market solutions based on its technology within AT&T’s business units at favorablepricing. In exchange, SpeechWorks issued AT&T 1,045,158 shares. SpeechWorks plans to marketthese solutions under its brand name to third parties. SpeechWorks announced Speechify, its text-


to-speech offering based on the AT&T technology, was generally available as of early Decemberand we expect revenues to ramp through 2001.

AOL. SpeechWorks signed a three-year non-exclusive agreement with AOL whereby SpeechWorkswill license its SpeechWorks 6 recognition software to AOL to voice-enable its online services. Inaddition to license fees (which should begin in the fourth quarter), SpeechWorks will support thedeployment of these solutions and receive service and maintenance fees. There is also a revenuesharing component to the AOL agreement, which is triggered if AOL, or its partners, achieve presetusage levels (or minimum user-based fees) with their voice portal. AOL will also grant two-yearlicenses for SPWX software to third parties to make AOL speech content available more broadly.Finally, AOL has agreed to place the SpeechWorks logo on its Web pages. In connection with thisagreement, SpeechWorks issued AOL 401,284 shares of stock at $12.46 in a private placementconcurrent with its IPO. The company also received warrants for 765,422 shares exercisable if AOLreaches minimum voice portal user milestones .

Net2Phone. This is an agreement under which SpeechWorks grants a software license andprovides professional services to Net2Phone to speech-enable its Voice-over-IP platform. Thecompanies have also agreeed to pursue joint marketing and promotions. Already, this partnership isbearing fruit with Net2Phone involved in deals with AT&T long distance and AOL long distance. Webelieve Net2Phone acquired 321,027 shares of SpeechWorks in June.

General Magic. A voice application service provider, General Magic and SpeechWorks havesigned a letter of intent to develop and host voice solutions for enterprise, telecom and Internetcompanies. General Magic plans to offer its customers SpeechWorks speech technologiesincluding the Text-to-Speech engine from AT&T as part of its magicTalk and Voice-XML-basedsolutions. SpeechWorks plans to offer its customers hosted solutions via General Magic.Interestingly, General Magic has also licensed Nuance’s speech recognition solution.

CompetitionWe outline SpeechWorks’ positioning vis-à-vis its primary competition, Nuance Communications andPhilips Electronics, below. Other vendors on our radar screen include: Conversa, Lernout & Hauspie(now bankrupt), Locus Dialogue (now InfoSpace), Lucent Technologies, Microsoft, IBM, InfoTalk,Phonetic Systems, TEMIC and Vocalis. Microsoft and IBM have historically focused on speech as acomputer interface (when combined with keyboard and mouse), rather than as a telephony interfacewhich is SpeechWorks’ focus. Microsoft has a Speech.Net Group as of 1993 and recently increasedits focus via its recent acquisition of Entropic.


The CompanySpeechWorks International is a leading provider of a suite of speech-recognition technologiesdesigned to voice enable applications for telcos, enterprises and Internet customers. The companyuses a combination of direct and third-party distribution to market an end-to-end solution of voiceinfrastructure (speech recognition, natural language understanding and text-to-speech technologies),applications and professional services. The company was founded in 1994 by a group fromMassachusetts Institute of Technology’s (MIT) Spoken Language Systems Group and is based inBoston, Massachusetts.

Investment ThesisSpeechWorks offers an end-to-end suite of voice solutions featuring infrastructure, applications andprofessional services. The company has established itself as a leader in this emerging high growth-market with deployments with a diverse group of approximately 200 communication serviceproviders, enterprises and Internet customers. Blue-chip customers attesting the performance ofSpeechWorks’ solutions include: MCI WorldCom, AOL, Yahoo!, Palm and Citigroup. We believe thespeech-recognition software market, projected by Datamonitor to reach more than $1.2 billion by2004, represents an even greater opportunity for SpeechWorks, $5–10 billion by 2005, whencombined with voice applications and professional services. We believe SpeechWorks, along withcompetitors Nuance and Philips are likely to capture at least 70–85% market share longer term dueto substantial barriers to entry for would-be competitors. The self-learning features in SpeechWorkssystems ensure its voice solutions get “smarter” the more they are used. Thus, the company’sspectacular market momentum should enable it to continue to widen its performance gap overcompetitors as it realizes our growth projections. SpeechWorks is a pure play on the followinggrowth trends, which, in our view, should mean average annual growth of at least 70% is possibleover the next few years.

• Call Management and the rise in voice solutions to replace expensive operator, touch-toneand/or PBX routing;

• CRM—Rising demand for voice automated call center and customer relationshipmanagement (CRM) solutions to reduce costs, improve customer satisfaction and loyalty;

• Voice Web Interfaces for Wireless Data navigation and use of special purpose voice portalsto access information via wireline and wireless phones; and

• mCommerce and the increasing use of telephone to initiate transactions, check orders andinventories.

Investment RisksAmong the risks are: (1) a limited period of operations and no history of profitability; (2) fluctuation inquarterly results stemming from its reliance on quarterly software licenses; (3) acceptance ofemerging technologies such as speech recognition, speech-to-text and human interface technology,which could be delayed in a weaker economic environment; (4) ability to execute global expansionstrategy; (5) ability to integrate current and future acquisitions; (6) dependence on distributionpartners to generate at least 40% of quarterly sales, including the inability to time large ordersassociated with sales of new equipment; (7) ability to adopt to evolving industry standards, such asVoiceXML and the risk these standards present to the value-proposition of SpeechWorks’ corerecognition engine; and (8) competition intensifying as the market for these products takes off.

Figure 35: SPEECHWORKS INTERNATIONAL INC.—QUARTERLY INCOME STATEMENT (in millions, except per share data)2000 2001E 2002E

FY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 1999 2000 2000E 2002E 2003E 2004EDirect $4.2 $4.3 $4.6 $6.5 $6.9 $8.2 $9.0 $10.1 $12.0 $19.6 $34.2Indirect 0.9 1.7 4.0 3.1 4.3 5.2 6.6 8.0 2.0 9.7 24.1% Indirect 18% 28% 46% 32% 38% 39% 42% 44% 14% 33% 41%Licenses 2.6 2.8 4.9 5.0 6.0 7.5 9.1 10.7 12.3 14.4 16.5 19.5 3.7 15.2 33.3 62.7 100.4 145.5Services 2.2 2.4 3.1 3.9 4.4 5.0 5.8 6.7 7.4 8.6 9.4 10.8 5.9 11.5 21.8 36.3 52.6 71.0Other Revenues 0.3 0.9 0.7 0.8 0.7 0.8 0.8 0.8 0.7 0.7 0.6 0.6 4.4 2.6 3.1 2.5 1.5 0.0Revenues 5.1 6.0 8.6 9.6 11.1 13.4 15.6 18.1 20.4 23.6 26.6 30.9 14.0 29.3 58.2 101.5 154.5 216.5License % 51% 46% 56% 52% 54% 56% 58% 59% 60% 61% 62% 63% 26% 52% 57% 62% 65% 67%Trailing Q4 Revenues 16 18 24 29 35 43 50 58 68 78 89 102

Cost of Licenses 0.0 0.1 0.0 0.1 0.1 0.2 0.2 0.2 0.2 0.3 0.3 0.4 0.2 0.2 0.7 1.3 2.0 2.9Cost of Services 1.7 1.9 2.3 2.9 3.5 3.9 4.5 5.0 5.5 6.3 6.7 7.6 5.0 8.8 16.9 26.1 36.8 47.6Cost of Other Revenues 0.2 0.7 0.6 0.6 0.6 0.7 0.7 0.6 0.6 0.6 0.5 0.5 3.0 2.0 2.6 2.1 1.3 0.0

Cost of Sales 1.9 2.6 2.9 3.6 4.2 4.8 5.3 5.8 6.4 7.1 7.6 8.4 8.1 11.1 20.1 29.5 40.1 50.5Licenses 2.6 2.7 4.8 4.9 5.9 7.4 8.9 10.5 12.0 14.1 16.2 19.1 3.5 15.0 32.7 61.5 98.4 142.6Services 0.5 0.5 0.8 0.9 0.9 1.1 1.3 1.7 1.9 2.3 2.7 3.3 1.0 2.7 4.9 10.2 15.8 23.4Other 0.2 0.2 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.4 0.6 0.5 0.4 0.2 0.0Gross Profit 3.2 3.5 5.7 5.9 6.9 8.6 10.3 12.3 14.1 16.5 19.0 22.5 5.9 18.2 38.1 72.0 114.4 166.1Gross Margin 63% 57% 66% 62% 62% 64% 66% 68% 69% 70% 71% 73% 42% 62% 65% 71% 74% 77%

Selling and Marketing 3.8 4.5 5.8 6.0 6.7 7.5 8.2 9.0 9.9 11.1 12.0 13.0 9.3 20.1 31.3 45.9 61.7 76.2Research and Development 1.8 2.0 2.2 2.2 2.3 2.5 2.7 3.0 3.5 4.0 4.4 4.9 5.2 8.2 10.6 16.8 24.9 34.2General and Administrative 3.3 3.7 4.5 4.8 4.9 5.0 5.1 5.2 5.3 5.3 5.4 5.4 6.7 16.2 20.1 21.4 23.7 27.3

Operating Expenses 8.9 10.1 12.4 13.0 13.9 15.0 16.0 17.1 18.6 20.4 21.7 23.4 21.1 44.5 62.1 84.2 110.2 137.7Opex Pct 175% 168% 144% 136% 125% 112% 103% 95% 91% 87% 82% 76% 151% 152% 107% 83% 71% 64%EBITA (5.7) (6.7) (6.8) (7.1) (7.0) (6.4) (5.7) (4.9) (4.6) (3.9) (2.7) (0.9) (15.2) (26.2) (24.0) (12.1) 4.2 28.3EBITA Margin (112)% (111)% (78)% (74)% (63)% (48)% (36)% (27)% (22)% (17)% (10)% (3)% (109)% (90)% (41)% (12)% 3% 13%Interest Income (Expense) 0.1 0.1 1.3 1.2 1.1 1.1 1.0 1.0 0.9 0.9 0.8 0.8 0.3 2.7 4.2 3.4 3.6 10.0Other Income 0.0 0.0 0.0 0.0 0.0 0.0Pretax Income (5.7) (6.6) (5.4) (5.9) (5.9) (5.3) (4.7) (3.9) (3.6) (3.0) (1.9) (0.1) (15.0) (23.6) (19.8) (8.7) 7.8 38.3

Taxes (3.3) (15.3) Net Income Before Amortization (5.7) (6.6) (5.4) (5.9) (5.9) (5.3) (4.7) (3.9) (3.6) (3.0) (1.9) (0.1) (15.0) (23.6) (19.8) (8.7) 4.5 23.0

Amortization of Stock Comp. (0.4) (0.7) (1.6) (1.6) (1.6) (1.6) (1.6) (1.6) (1.6) (1.6) (1.6) (1.6) (0.5) (4.3) (6.4) (6.4) (6.4) (6.4)Amortization of IntellectualProperty Rights

(1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) 0.0 (1.9) (3.8) (3.8) (3.8) (3.8)

Extraordinary Items (6.1) (0.3)Reported Net Income (6.1) (13.3) (8.3) (8.4) (8.4) (7.9) (7.2) (6.5) (6.2) (5.6) (4.5) (2.7) (15.5) (29.8) (30.0) (19.0) (5.7) 12.7Earnings per Share

Quarterly Operating $(0.29) $(0.29) $(0.20) $(0.20) $(0.20) $(0.18) $(0.15) $(0.13) $(0.12) $(0.10) $(0.06) $(0.00)Quarterly Reported $(0.31) $(0.59) $(0.30) $(0.28) $(0.28) $(0.26) $(0.24) $(0.21) $(0.20) $(0.18) $(0.14) $(0.06)Trailing Q4 Operating $(0.94) $(1.09) $(1.10) $(0.98) $(0.88) $(0.77) $(0.72) $(0.66) $(0.58) $(0.50) $(0.41) $(0.28) $(0.82) $(0.98) $(0.66) $(0.28) $0.10 $0.50Trailing Q4 Reported $(0.98) $(1.44) $(1.54) $(1.49) $(1.46) $(1.13) $(1.07) $(1.00) $(0.92) $(0.84) $(0.74) $(0.59) $(0.85) $(1.20) $(0.99) $(0.56) $(0.13) $0.28

Average Pro Forma Diluted Shares 19.5 22.4 27.7 29.8 30.0 30.1 30.3 30.4 30.6 30.7 30.9 42.4 18.2 24.8 30.2 33.6 43.7 45.7.Margin AnalysisRevenue MixLicense 51% 46% 56% 52% 54% 56% 58% 59% 60% 61% 62% 63% 26% 52% 57% 62% 65% 67%Services 42% 39% 36% 40% 39% 38% 37% 37% 36% 36% 35% 35% 42% 39% 38% 36% 34% 33%Other 6% 15% 8% 8% 6% 6% 5% 4% 3% 3% 2% 2% 31% 9% 5% 2% 1% 0%Revenue Growth Q/QLicense 68% 6% 75% 2% 22% 25% 20% 18% 15% 17% 15% 18%Services 13% 10% 31% 25% 13% 15% 15% 15% 12% 15% 10% 15%Total 17% 19% 43% 11% 16% 20% 17% 16% 13% 15% 13% 16%Revenue Growth Y/YLicense 665% 164% 562% 219% 132% 172% 87% 116% 104% 91% 83% 83% 135% 313% 120% 88% 60% 45%Services 96% 44% 138% 103% 103% 113% 87% 72% 70% 70% 63% 63% 107% 93% 90% 66% 45% 35%Total 55% 59% 237% 120% 118% 122% 81% 89% 84% 76% 70% 71% 211% (40)% 16% (18)% (40)% NA

License 98% 98% 99% 99% 98% 98% 98% 98% 98% 98% 98% 98% 96% 98% 98% 98% 98% 98%Services 22% 21% 24% 24% 20% 22% 23% 25% 26% 27% 29% 30% 16% 23% 23% 28% 30% 33%Other 53% 26% 17% 16% 15% 15% 15% 15% 15% 15% 15% 15% 32% 24% 15% 15% 15% NA

Gross Margin 63% 57% 66% 62% 62% 64% 66% 68% 69% 70% 71% 73% 42% 62% 65% 71% 74% 77%Selling and Marketing 75% 74% 67% 63% 60% 56% 53% 50% 49% 47% 45% 42% 66% 69% 54% 45% 40% 35%Research and Development 36% 33% 25% 23% 21% 19% 18% 17% 17% 17% 17% 16% 37% 28% 18% 17% 16% 16%General and Administrative 65% 61% 52% 50% 44% 37% 33% 29% 26% 23% 20% 18% 48% 55% 35% 21% 15% 13%

Operating Expenses 175% 168% 144% 136% 125% 112% 103% 95% 91% 87% 82% 76% 151% 152% 107% 83% 71% 64%Operating Margin (112)% (111)% (78)% (74)% (63)% (48)% (36)% (27)% (22)% (17)% (10)% (3)% (109) (90)% (41)% (12)% 3% 13%Pretax Margin (112)% (109)% (63)% (61)% (53)% (40)% (30)% (22)% (18)% (13)% (7)% 0% (107)% (80)% (34)% (9)% 5% 18%

Tax Margin 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% (42)% (40)%Net Income Margin (112)% (109)% (63)% (61)% (53)% (40)% (30)% (22)% (18)% (13)% (7)% 0% (107)% (80) (34)% (9)% 3% 11%

Cash operating net income excludes non-cash charges.29 million shares IPO at $20 on July 31, 2000.Source: Company reports and Robertson Stephens estimates.

Figure 36: SPEECHWORKS INTERNATIONAL—CASH FLOW STATEMENT ($ in millions)

2000 2001E 2002E 2003EFY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4Operating Sources

Earnings $(6.1) $(13.3) $(8.3) $(8.4) $(8.4) $(7.9) $(7.2) $(6.5) $(6.2) $(5.6) $(4.5) $(2.7) $(2.9) $(1.8) $(1.1) $0.1Depreciation 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.5 0.5 0.5 0.5 0.5 0.5Other 0.0Total (5.7) (12.9) (7.9) (8.0) (8.0) (7.5) (6.8) (6.0) (5.8) (5.2) (4.0) (2.2) (2.5) (1.4) (0.6) 0.6

Operating RequirementsNet Trade (0.1) 1.8 (0.3) (2.4) (0.3) 0.1 0.1 0.1 (0.7) (0.9) (0.1) (1.4) (0.0) (0.4) (2.0) (2.7)Capital Outlays 1.2 5.7 8.7 0.9 1.3 1.7 1.1 1.7 0.8 2.0 1.9 2.6 0.5 1.4 1.7 3.4Software DevelopmentOther (0.1) 6.6 (8.5) 15.5 (2.6) (2.6) (2.6) (2.6) (2.6) (2.6) (2.6) (2.6) (2.6) (2.6) 0.0 0.0Total 1.0 14.1 (0.1) 14.0 (1.6) (0.8) (1.4) (0.8) (2.5) (1.6) (0.8) (1.4) (2.1) (1.6) (0.3) 0.7

Funds Produced (consumed) (6.8) (27.0) (7.8) (22.1) (6.4) (6.7) (5.4) (5.3) (3.3) (3.6) (3.2) (0.8) (0.4) 0.2 (0.3) (0.0)Less: DividendsNet Funds Produced (consumed) (6.8) (27.0) (7.8) (22.1) (6.4) (6.7) (5.4) (5.3) (3.3) (3.6) (3.2) (0.8) (0.4) 0.2 (0.3) (0.0)

Increase in Excess Cash (6.5) 11.1 103.1 (11.3) (6.4) (6.7) (5.4) (5.3) (3.3) (3.6) (3.2) (0.8) (0.4) 0.2 (0.3) (0.0)

Net Surplus (0.3) (38.1) (110.9) (10.8) 0.0 (0.0) 0.0 0.0 (0.0) 0.0 (0.0) 0.0 (0.0) 0.0 (0.0) (0.0)

Sources of External CapitalShort-Term Debt (0.1) (0.1) (0.0) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Long-Term Debt (0.2) (0.1) (0.1) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Redeemable Convertible Stock 0.6 20.8 (64.9) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0Equity (0.1) 17.5 176.0 10.8 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 (0.0) 0.0Total 0.3 38.1 110.9 10.8 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 (0.0) 0.0

Cash Flow SummaryQuarter Start Cash $11.5 $5.0 $16.2 $119.5 $108.3 $102.0 $95.5 $90.3 $85.3 $82.1 $78.8 $75.8 $75.4 $75.0 $75.6 $75.7

+ Funds Produced (consumed) byOperations

(6.8) (27.0) (7.8) (22.1) (6.4) (6.7) (5.4) (5.3) (3.3) (3.6) (3.2) (0.8) (0.4) 0.2 (0.3) (0.0)

+ Increase in Operating Cash 0.1 0.1 0.2 0.1 0.1 0.2 0.2 0.2 0.2 0.3 0.2 0.3 0.0 0.4 0.4 0.5= Net Funds Produced by Operations (6.7) (27.0) (7.6) (22.0) (6.3) (6.5) (5.2) (5.1) (3.1) (3.4) (3.0) (0.4) (0.4) 0.6 0.0 0.5

+ Funds Produced by Financing 0.3 38.1 110.9 10.8 0.0 0.0 0.0 0.0 0.0 (0.0) 0.0 0.0 0.0 0.0 (0.0) 0.0- Funds Used by Dividends 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Quarter-End Cash 5.0 16.2 119.5 108.3 102.0 95.5 90.3 85.3 82.1 78.8 75.8 75.4 75.0 75.6 75.7 76.2

Quarterly Increase in Cash (6.4) 11.2 103.3 (11.2) (6.3) (6.5) (5.2) (5.1) (3.1) (3.4) (3.0) (0.4) (0.4) 0.6 0.0 0.5Increase in Cash/Share $(0.33) $0.50 $3.73 $(0.38) $(0.21) $(0.22) $(0.17) $(0.17) $(0.10) $(0.11) $(0.10) $(0.01) $(0.01) $0.01 $0.00 $0.01Funds Produced by Operations/Share $(0.34) $(1.20) $(0.27) $(0.74) $(0.21) $(0.22) $(0.17) $(0.17) $(0.10) $(0.11) $(0.10) $(0.01) $(0.01) $0.01 $0.00 $0.01


Figure 37: SPEECHWORKS INTERNATIONAL—RETURN ON INVESTED CAPITAL (ROIC) ($ in millions)

2000 2001E 2002E 2003EFY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

Earnings Before Interest and Tax (EBIT) $(6.1) $(7.3) $(9.3) $(9.7) $(9.6) $(9.0) $(8.3) $(7.4) $(7.1) $(6.5) $(5.3) $(3.5) $(3.8) $(2.2) $(1.0) $1.0

Tax Provision 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.5 1.0 1.8+Shield From Interest Expense 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 (0.4) (0.4) (0.4)

- Adjusted Taxes 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.6 1.4

+ Increase in Capitalized R&D 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0+ Amortization of Goodwill 0.4 0.7 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6

Net Operating Profit After Tax (NOPAT) (5.7) (6.7) (6.8) (7.1) (7.0) (6.4) (5.7) (4.9) (4.6) (3.9) (2.7) (0.9) (1.2) 0.2 0.9 2.1

Annualized NOPAT (22.9) (26.7) (27.0) (28.4) (28.0) (25.7) (22.8) (19.5) (18.2) (15.7) (10.9) (3.6) (4.8) 0.8 3.7 8.5TTM NOPAT (18.5) (22.4) (25.3) (26.2) (27.5) (27.3) (26.2) (24.0) (21.6) (19.1) (16.1) (12.1) (8.8) (4.6) (1.0) 2.0Incremental NOPAT 0.5 (1.0) (0.1) (0.3) 0.1 0.6 0.7 0.8 0.3 0.6 1.2 1.8 (0.3) 1.4 0.7 1.2

Invested Capital 10.9 35.8 138.4 140.7 132.3 124.4 117.1 110.7 104.5 98.9 94.4 91.7 88.8 86.9 85.9 86.0Excess Cash 4.6 15.7 118.8 107.5 101.1 94.5 89.1 83.8 80.5 76.9 73.7 72.9 72.5 72.8 72.4 72.4

Invested Capital in Operations 6.3 20.0 19.6 33.2 31.1 29.9 28.1 26.9 24.0 22.0 20.7 18.8 16.3 14.2 13.4 13.6Incremental Invested Capital in Operations 0.7 13.7 (0.5) 13.6 (2.0) (1.2) (1.8) (1.2) (2.9) (2.0) (1.3) (1.9) (2.5) (2.1) (0.8) 0.2

Annualized Quarterly ROIC (362)% (133)% (138)% (85)% (90)% (86)% (81)% (73)% (76)% (72)% (53)% (19)% (29)% 5% 27% 62%TTM ROIC (293)% (112)% (130)% (79)% (88)% (91)% (93)% (89)% (90)% (87)% (78)% (65)% (54)% (33)% (7)% 15%TTM Return On Average Invested Cap. (309)% (170)% (128)% (100)% (86)% (89)% (90)% (87)% (85)% (83)% (75)% (61)% (50)% (30)% (7)% 15%Incremental ROIC 7% (5)% 0% (1)% 0% 2% 3% 3% 1% 3% 6% 10% (2)% 10% 5% 9%



January 26, 2001

SpeechWorks International Inc.SPWX $41.94


Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 ERating: No Buy EPS:EPS 2001E: No $(0.66) 1Q $(0.29) $(0.20) $(0.12)EPS 2002E: No $(0.28) 2Q $(0.29) $(0.18) $(0.10)Rev 2001E: Yes $60.0 3Q $(0.20) $(0.15) $(0.06)Rev 2002E: Yes $106.0 4Q $(0.20) $(0.13) $0.00

Year $(0.98) $(0.66) $(0.28)52-Week Range: $109–8 P/E NM NM NMFully Diluted Shares Outstanding (MM): 30.2Market Cap (MM): $1,266.6Average Daily Volume (000): NA Revenues (MM): 2000 2001 E 2002 EBook Value/Share 12/00: $4.36 1Q $5.1 $11.3 $21.33-Year Secular Growth Rate: 100.00% 2Q $6.0 $13.7 $24.6Dividend/Yield: None/None 3Q $8.6 $16.2 $27.7Price/Book Value 12/00: 9.6x 4Q $10.6 $18.9 $32.3Net Cash 12/00 (MM): $112.8 Year $30.3 $60.0 $106.0Net Cash/Share 12/00: $3.74 Eqty Mkt/Rev NM 21.1x 11.9x

• SpeechWorks Reports Strong December Quarter. SpeechWorks reported Q4 results of $10.6million and $(0.17), both above our $9.6 million and $(0.20) estimates. License sales of $6.1million well exceeded our $5-million estimate, resulting in better-than-expected gross margins of71% (versus our 68% estimate). The cash balance remained healthy at $113.6 million, whileDSOs increased 10 days to 75, but stayed below the expected range of 80–85 days.

• Several Important Q4 Customer Wins Should Be Followed Soon by More Announcements,Particularly in the International and Wireless Areas. In conjunction with the quarterly resultsannouncement, SpeechWorks announced new wins at Checkfreea (CKFR $49), GMACCommercial Mortgage and Thrifty Rental Car, and follow-on wins at Continental Airlines andAudiopoint. As the prevalence of voice-enabling technologies grows worldwide, we believeSpeechWorks is close to being able to announce important new international wins—perhaps asearly as sometime in the next few weeks. We also expect wireless carriers will be an importantcustomer group to watch going forward, as carriers look for voice solutions ranging from voicedialing and directory assistance to voice portal capabilities.

• With the Stock Up Significantly Since January 9 and an 18-Million Share Lock-Up Releaseon Monday January 29, We Think SpeechWorks Could Be Volatile Near Term. We believeSpeechWorks’ rocketing valuation and the pending increase of its float could leave it vulnerablenear term. We size the supply coming to market at perhaps 1–3 million of the 18 million sharesto be released, assuming the stock due next week is mainly held by officers (approximately 5million shares) that are subject to Rule 144 volume restrictions and VCs (approximately 11million). In light of SpeechWorks’ strong Q4 results, solid momentum and visibility, we continueto support the long-term fundamentals of the company and the voice industry. In our view,SpeechWorks is a solid long-term investment for those wishing to own a pure player in therapidly evolving voice industry and any weakness related to the increase in its float shouldrepresent a good entry point for investors.

• SpeechWorks’ Continues to Build a Strong International Presence. With approximately 13%of Q4 revenues, or $1.4 million, coming from international sales, we believe SpeechWorks is


continuing to execute well against its long-term goal of a 50/50 North American/Internationalrevenue mix. We believe the company’s strongest international presence is in the AsiaPacregion—particularly in Korea and Singapore and increasingly so in Australia. We believe Europeis a focus area for the company, especially as it evolves into a more robust market for voicesolutions. Though SpeechWorks faces tough competition in Europe from Philips and Nuance, webelieve there may be several European wins for SpeechWorks over the next 3–6 months.

• Increasingly Robust Partner Channel Should Contribute to Better Distribution. Since 1999,SpeechWorks more than tripled its number of partners—a key part of improving its internationalpresence. Though historical partner InterVoice-Brite remains the company’s most significantdistributor (represented 14% of Q4 revenues), we believe a broadening range of partnershipswith ASPs, systems integrators and communication systems vendors will play an important rolein the continued broadened distribution of SpeechWorks’ technology. For the fourth quarter andfull-year 2000, indirect sales represented 44% and 37%, respectively, of total revenues.

• Company Is Taking Prudent Measures in the Unlikely Case of Bad Debt. Despite a lowexposure (less than 5% of total 2000 revenues) to higher-risk “dot.com” customers,SpeechWorks is wisely taking steps to guard against any potential bad debt concerns. Thoughthe bulk of revenues are generated from large enterprises (40–50%), carriers (25–30%) andportals like AOL and Yahoo! (15–20%), we are glad to see SpeechWorks taking such prudentreserve measures. In the December quarter the company increased its bad debt reserve to$600,000, up from $250,000 to protect against any potential bad debt and announced plans tocontinue taking additional reserves for the next 1–2 quarters.

• Raising 2001 and 2002 Top-Line Estimates to Reflect Acquisition; Maintaining EPSForecasts, but Excellent Visibility and Continuing Deal Momentum Should Signal Upsidein 2001. We are slightly increasingly our 2001 and 2002 revenue estimates to $60 million and$106 million, up from $58 million and $101.5 million, to reflect the December acquisition ofEloquent. We are maintaining our annual EPS estimates of $(0.66) and $(0.28), respectively.Though we are keeping our estimates steady at this time, we believe the combination of theSpeechWorks’ growing backlog, excellent visibility and continuing momentum with new andfollow-on wins should provide upside to our estimates throughout 2001.


The CompanySpeechWorks International is a leading provider of a suite of speech-recognition technologiesdesigned to voice enable applications for telcos, enterprises and Internet customers. The companyuses a combination of direct and third-party distribution to market an end-to-end solution of voiceinfrastructure (speech recognition, natural language understanding and text-to-speech technologies),applications and professional services. The company was founded in 1994 by a group fromMassachusetts Institute of Technology’s (MIT) Spoken Language Systems Group and is based inBoston, Massachusetts.

Investment ThesisSpeechWorks offers an end-to-end suite of voice solutions featuring infrastructure, applications andprofessional services. The company has established itself as a leader in this emerging high growth-market with deployments with a diverse group of approximately 200 communication serviceproviders, enterprises and Internet customers. Blue-chip customers attesting the performance ofSpeechWorks’ solutions include: MCI WorldCom, AOL, Yahoo!, Palm and Citigroup. We believe thespeech-recognition software market, projected by Datamonitor to reach more than $1.2 billion by2004, represents an even greater opportunity for SpeechWorks, $5–10 billion by 2005, whencombined with voice applications and professional services. We believe SpeechWorks, along withcompetitors Nuance and Philips are likely to capture at least 70–85% market share longer term dueto substantial barriers to entry for would-be competitors. The self-learning features in SpeechWorkssystems ensure its voice solutions get “smarter” the more they are used. Thus, the company’sspectacular market momentum should enable it to continue to widen its performance gap overcompetitors as it realizes our growth projections. SpeechWorks is a pure play on the followinggrowth trends, which, in our view, should mean average annual growth of at least 70% is possibleover the next few years. Call Management and the rise in voice solutions to replace expensiveoperator, touch-tone and/or PBX routing. Rising demand for voice-automated call center andcustomer relationship management (CRM) solutions to reduce costs, improve customer satisfactionand loyalty; Voice Web Interfaces for Wireless Data navigation and use of special purpose voiceportals to access information via wireline and wireless phones; and mCommerce and the increasinguse of telephone to initiate transactions, check orders and inventories.

Investment RisksAmong the risks are: (1) a limited period of operations and no history of profitability; (2) fluctuation inquarterly results stemming from its reliance on quarterly software licenses; (3) acceptance ofemerging technologies such as speech recognition, speech-to-text and human interface technology,which could be delayed in a weaker economic environment; (4) ability to execute global expansionstrategy; (5) ability to integrate current and future acquisitions; (6) dependence on distributionpartners to generate at least 40% of quarterly sales, including the inability to time large ordersassociated with sales of new equipment; (7) ability to adopt to evolving industry standards, such asVoiceXML and the risk these standards present to the value-proposition of SpeechWorks’ corerecognition engine; and (8) competition intensifying as the market for these products takes off.

Figure 38: SPEECHWORKS INTERNATIONAL INC.—QUARTERLY INCOME (in millions, excpet per share data)2000 2001E 2002E

FY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 C99 C00 C01 C01Licenses $2.6 $2.8 $4.9 $6.1 $6.3 $7.9 $9.6 $11.4 $13.1 $15.3 $17.6 $20.8 $3.7 $16.4 $35.2 $66.9Services 2.2 2.4 3.1 3.6 4.3 5.0 5.8 6.7 7.5 8.6 9.5 10.9 5.9 11.3 21.8 36.5Other Revenues 0.3 0.9 0.7 0.8 0.7 0.8 0.8 0.8 0.7 0.7 0.6 0.6 4.4 2.7 3.1 2.5Revenues 5.1 6.0 8.6 10.6 11.3 13.7 16.2 18.9 21.3 24.6 27.7 32.3 14.0 30.3 60.0 105.9License % 51% 46% 56% 58% 56% 58% 59% 60% 62% 62% 64% 64% 26% 54% 59% 63%Trailing Q4 Revenues 16 18 24 30 37 44 52 60 70 81 93 106

Cost of Licenses 0.0 0.1 0.0 0.1 0.1 0.2 0.2 0.2 0.3 0.3 0.4 0.4 0.2 0.2 0.7 1.3Cost of Services 1.7 1.9 2.3 2.5 3.2 3.7 4.2 4.8 5.4 6.2 6.8 7.7 5.0 8.4 15.9 26.1Cost of Other Revenues 0.2 0.7 0.6 0.5 0.6 0.7 0.7 0.6 0.6 0.6 0.5 0.5 3.0 1.8 2.6 2.1

Cost of Sales 1.9 2.6 2.9 3.0 3.9 4.5 5.1 5.7 6.3 7.1 7.6 8.6 8.1 10.4 19.2 29.6Licenses 2.6 2.7 4.8 6.1 6.2 7.7 9.4 11.2 12.8 15.0 17.3 20.4 3.5 16.1 34.5 65.6Services 0.5 0.5 0.8 1.2 1.1 1.3 1.6 1.9 2.1 2.4 2.7 3.2 1.0 2.9 5.8 10.4Other 0.2 0.2 0.1 0.3 0.1 0.1 0.1 0.1 0.1 0.1 0.1 0.1 1.4 0.8 0.5 0.4Gross Profit 3.2 3.5 5.7 7.5 7.4 9.1 11.1 13.2 15.1 17.5 20.1 23.7 5.9 19.9 40.8 76.4Gross Margin 63% 57% 66% 71% 65% 67% 68% 70% 71% 71% 72% 73% 42% 66% 68% 72%

Selling and Marketing 3.8 4.5 5.8 5.7 6.3 6.9 7.7 9.0 10.4 11.4 12.4 13.4 9.3 19.8 29.9 47.6Research and Development 1.8 2.0 2.2 2.7 2.8 2.9 3.0 3.1 3.4 3.9 4.4 4.9 5.2 8.7 11.8 16.6General and Administrative 3.3 3.7 4.5 5.9 6.0 6.1 6.2 6.3 6.3 6.4 6.4 6.5 6.7 17.3 24.5 25.6

Operating Expenses 8.9 10.1 12.4 14.3 15.0 15.9 16.9 18.4 20.1 21.7 23.2 24.8 21.1 45.8 66.1 89.8Opex Pct 175% 168% 144% 135% 133% 116% 104% 97% 94% 88% 84% 77% 151% 151% 110% 85%EBITA (5.7) (6.7) (6.8) (6.7) (7.6) (6.8) (5.8) (5.2) (5.1) (4.1) (3.1) (1.1) (15.2) (25.9) (25.4) (13.4)EBITA Margin (112)% (111)% (78)% (64)% (68)% (49)% (36)% (28)% (24)% (17)% (11)% (3)% (109)% (85)% (42)% (13)%Interest Income (Expense) 0.1 0.1 1.3 1.8 1.7 1.7 1.6 1.6 1.5 1.5 1.4 1.4 0.3 3.3 6.5 5.7Other Income 0.0 0.0 0.0 0.0 0.0Pretax Income (5.7) (6.6) (5.4) (4.9) (5.9) (5.1) (4.2) (3.6) (3.6) (2.7) (1.7) 0.3 (15.0) (22.6) (18.8) (7.7)

Taxes (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) (0.3) Net Income Before Amortization (5.7) (6.6) (5.4) (5.2) (6.3) (5.4) (4.5) (3.9) (3.9) (3.0) (2.0) 0.0 (15.0) (22.6) (18.8) (7.7)

Amortization of Stock Comp. (0.4) (0.7) (1.6) (2.1) (2.1) (2.1) (2.1) (2.1) (2.1) (2.1) (2.1) (2.1) (0.5) (4.7) (8.3) (8.3)Amortization of Intellectual Property Rights (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) (1.0) 0.0 (1.9) (3.8) (3.8)Extraordinary Items (6.1) (0.3)

Reported Net Income (6.1) (13.3) (8.3) (8.3) (9.3) (8.4) (7.5) (7.0) (6.9) (6.0) (5.1) (3.1) (15.5) (29.3) (30.9) (19.8)Earnings per Share

Quarterly Operating $(0.29) $(0.29) $(0.20) $(0.17) $(0.20) $(0.18) $(0.15) $(0.13) $(0.12) $(0.10) $(0.06) $0.00Quarterly Reported $(0.31) $(0.59) $(0.30) $(0.27) $(0.30) $(0.27) $(0.24) $(0.22) $(0.22) $(0.19) $(0.16) $(0.07)Trailing Q4 Operating $(0.94) $(1.09) $(1.10) $(0.96) $(0.87) $(0.75) $(0.70) $(0.65) $(0.57) $(0.49) $(0.41) $(0.28) $(0.82) $(0.96) $(0.66) $(0.28)Trailing Q4 Reported $(0.98) $(1.44) $(1.54) $(1.48) $(1.47) $(1.15) $(1.09) $(1.04) $(0.96) $(0.88) $(0.80) $(0.64) $(0.85) $(1.17) $(1.00) $(0.58)

Average Pro Forma Diluted Shares 19.5 22.4 27.7 30.2 30.6 30.8 30.9 31.1 31.2 31.4 31.5 43.1 18.2 24.9 30.8 34.3.Margin AnalysisRevenue MixLicense 51% 46% 56% 58% 56% 58% 59% 60% 62% 62% 64% 64% 26% 54% 59% 63%Services 42% 39% 36% 35% 38% 36% 36% 36% 35% 35% 34% 34% 42% 37% 36% 34%Other 6% 15% 8% 8% 6% 6% 5% 4% 3% 3% 2% 2% 31% 9% 5% 2%Revenue Growth Q/QLicense 68% 6% 75% 26% 3% 25% 22% 19% 15% 17% 15% 18%Services 13% 10% 31% 18% 18% 15% 17% 16% 12% 15% 10% 15%Total 17% 19% 43% 22% 7% 21% 19% 16% 13% 16% 13% 16%Revenue Growth Y/YLicense 665% 164% 562% 294% 142% 185% 98% 86% 108% 94% 84% 83% 135% 344% 115% 90%Services 96% 44% 138% 91% 99% 109% 87% 84% 75% 74% 64% 63% 107% 89% 93% 68%Total 55% 59% 237% 142% 122% 126% 88% 79% 89% 80% 71% 71% 211% (39)% 14% (18)%

License 98% 98% 99% 99% 98% 98% 98% 98% 98% 98% 98% 98% 96% 99% 98% 98%Services 22% 21% 24% 32% 25% 26% 27% 28% 28% 28% 29% 30% 16% 26% 27% 29%Other 53% 26% 17% 40% 15% 15% 15% 15% 15% 15% 15% 15% 32% 31% 15% 15%

Gross Margin 63% 57% 66% 71% 65% 67% 68% 70% 71% 71% 72% 73% 42% 66% 68% 72%Selling and Marketing 75% 74% 67% 54% 55% 51% 48% 48% 49% 46% 45% 42% 66% 65% 50% 45%Research and Development 36% 33% 25% 25% 24% 21% 19% 16% 16% 16% 16% 15% 37% 29% 20% 16%General and Administrative 65% 61% 52% 55% 53% 45% 38% 33% 30% 26% 23% 20% 48% 57% 41% 24%

Operating Expenses 175% 168% 144% 135% 133% 116% 104% 97% 94% 88% 84% 77% 151% 151% 110% 85%Operating Margin (112)% (111)% (78)% (64)% (68)% (49)% (36)% (28)% (24)% (17)% (11)% (3)% (109)% (85)% (42)% (13)%Pretax Margin (112)% (109)% (63)% (47)% (53)% (37)% (26)% (19)% (17)% (11)% (6)% 1% (107)% (75)% (31)% (7)%

Tax Margin 0% 0% 0% 6% 5% 6% 7% 9% 9% 12% 18% (110)% 0% 0% 0% 0%Net Income Margin (112)% (109)% (63)% (50)% (55)% (40)% (28)% (21)% (18)% (12)% (7)% 0% (107)% (75)% (31)% (7)%



PRIVATE COMPANY PROFILES


BeVocalCEO, C. Mikael Bernerwww.bevocal.com

The CompanyBeVocal, founded in 1999, develops voice portal applications and services for telecommunicationscompanies and enterprises. The company’s headquarters are in Sunnyvale, California. Thecompany’s voice portal applications can be customized to deliver location-sensitive, personalizedinformation to any user via any device. Investors in BeVocal include Mayfield Fund, U.S. VenturePartners, Technology Crossover Ventures, TransCosmos U.S.A. and individuals.

Products and ServicesBeVocal offers a hosting network and automated voice solutions including voice portal applications,voice infrastructure software, as well as commercial and developmental hosting. The company’svoice portal applications include a yellow-pages-type search engine, nationwide driving directions,flight and weather information, and news, stock quotes and entertainment information. This voiceportal currently powers Qwest’s voice portal service and is in trial by Sprint PCS. This service can bedemonstrated by dialing 1-800-4BVocal. BeVocal’s voice infrastructure software includes adevelopment platform, BeVocal Café and a platform and application server, BeVocal Boost.BeVocal’s portal can give be personalized like Web portals and can also provide location-sensitiveinformation, providing extra value to enterprises and carriers. BeVocal uses VoiceXML, NuanceSpeechObjects and other voice technologies.

PartnersNuance, Natural MicroSystems

CustomersSprint PCS, Qwest


ConversayCEO, Steve Rondelwww.conversay.com

The CompanyConversay, founded in 1994, develops and markets voice-enabled technologies including ASR, TTS,embedded speech elements and server software. Its voice recognition software can be embedded inhandheld devices such as the PocketPC or a Linux-based PDA. The company is headquartered inRedmond, Washington.

Products and ServicesConversay offers a set of core speech technologies that enable interaction with network-basedinformation. The company’s embedded Conversay Advanced Symbolic Speech Interpretor (CASSI)engine functions both as a speech recognizer and as a text synthesizer and can be incorporated intoa variety of devices. The company is working with Samsung to develop a speech-enabledwatchphone using this speech recognition software. This software is compatible with Openwave’sUP.Link Browser and the Windows CE platform.

Conversation server provides an interface to Internet content through the telephone. This allowsenterprises to customize speech-enabled solutions without high development costs.

Technology SupportedWindows (CE, NT, 98 and 2000 operating systems), Linux-based YOPY PDA System and others.The technology ports to the Intel Pentium processor and others.

Partners3Coma, Integrated Information Systemsa,b, Openwave Systemsa,b, AirTrac, Samsung, Macromedia,CenterCom


EtrieveCEO, Mike Maerzwww.etrieve.com

The CompanyEtrieve’s e-mail retrieval solutions allow mobile professionals to connect with the office via phone, invoice (e-mails read and audio files attached for reply) or in text (over a WAP browser). Mobileprofessionals can use Etrieve 24 hours a day to receive e-mail written to and sent from the corporatee-mail address over a wireless phone. Users can manage e-mail via voice and text with the sameoptions of priority and screening that are offered by most corporate e-mail solutions. The company isbased in Hillsboro, Oregon, and was founded in 1998. Investors include Ignition, Softbank VentureCapital, Madrona Venture Group, Timberline Ventures and Venture Partners.

ProductsEtrieve offers both desktop- and server-based mobile e-mail solutions for enterprises. Thetechnology polls the desktop e-mail software (such as Microsoft Outlook) for unread e-mail anddrops it in the Etrieve box for retrieval. Mail from high priority addresses can be marked so that thephone alerts the user when e-mail from that address arrives. If a user receives an attachment withhis e-mail, he can direct it to a nearby fax machine and retrieve it. In order to send messages, usersrecord a .WAV audio file or enter text into the WAP browser. Etrieve’s architecture allows users toemploy both voice and text interchangeably. Monthly fees for service range from $19.95 for basictoll-access service including 120 minutes ($0.25 for each additional minute) to $49.95 for unlimitedtoll-free access. Etrieve supports POP 3 e-mail accounts as well as Yahoo!, Mindspring, Earthlinkand other ISPs.

CustomersInFocus, Perkins Coie, Standard Insurance Company, Silicon Valley Bank

PartnerDialogic (an Intel Company), Parity Software, IronSpire, Tripwire

etrieve


Gold SystemsCEO, Terry Goldwww.goldsys.com

The CompanyGold Systems provides voice-enabled information retrieval solutions for customer serviceapplications and enterprise communications. Based in Boulder, Colorado, the company designs andmarkets voice recognition solutions to the financial, health care, insurance, government, retail andtelecommunications industries. The company was founded in 1991 and is backed by privateinvestors, Sorenson Limited Partnership, Softbank Venture Capital and others.

Products and ServicesGold Systems’ customer service solutions are designed to allow information retrieval and databaseupdates via voice. The company’s main customer service application is Vonetix, a system thatenables callers to obtain information from and navigate through database applications. GoldSystems has a traditional voice response application as well as more advanced speech recognitiontechnologies. Its advanced speech technologies include its Natural Language Speech Recognitioninterface application, speaker verification software, personalization applications and customer-specific applications. Using these solutions, customers and mobile professionals can accessinformation and interact with the voice application just as if they were talking to a customer servicerepresentative or accessing information over a corporate intranet. The solutions can interface to anyODBC-compliant database, front-end enterprise software package (such as Siebel), back-endpackages (like SAP and PeopleSoft), middleware packets or mainframe systems.

CustomersAn extensive list of customers from several different industries includes MetLife, Compaq, Hewlett-Packard, GE Capital, AT&T, Intuita,b and others.


HeyAnitaCEO, Sanjeev Kuwadekarwww.heyanita.com

The CompanyHeyAnita is a voice technology software company, headquartered in Los Angeles, California,providing a software platform (HeyAnita Free Speech Platform), voice browser, developer tools,prepackaged voice applications and custom voice applications to businesses. HeyAnita’s technologyallows Web-based information and content to be delivered to end users (consumer or business-based) via any phone, anywhere, anytime by using their voice.

Investors in HeyAnita include Softbank Technology Ventures, Korea Thrunet, Naray MobileTelecom, Net2Phone and TriGem Computer.

Products and ServicesHeyAnita’s voice portal service can be accessed through dialing 1-800-44-ANITA. Through theservice, consumers can access information about stock quotes, weather, travel information,shopping and more. HeyAnita’s private-label program provides voice solutions for businesses thatwish to voice enable access to their goods and services. In addition, HeyAnita’s Free SpeechPlatform enables the development of applications with no special hardware, multiple languages,hosting from any Internet server and enhanced third-party user interfaces. HeyAnita uses theSpeechWorks voice recognition engine.

Technology SupportedVoiceXML, VB, C++, Java

CustomersHeyAnita’s voice portal is marketed to consumers.

PartnersDialogic, SpeechWorks, Telera, Net2Phone


IndicastCEO, Bob Osiaswww.indicast.com

The CompanyIndicast, located in Carlsbad, California, provides personalized audio Internet portals to wirelesscarriers, Web portal providers and large enterprises. Indicast allows users to create a personalizedbroadcast setting by selecting specific types of audio content from a personalized Web site. This“individual broadcast” can then be accessed using any phone. Investors in Indicast include VentureManagement Associates.

ProductsThe company’s three-part OEM voice portal solution consists of a voice user interface technology,voice ASP and audio content. The solution is highly scalable, based on open standards and utilizesVoiceXML technology. The technology uses simple and flexible voice commands that exist asproduction quality audio rather than synthetic text-to-speech. These voice commands allow users tonavigate through their personalized audio content or all other audio content available. Indicast nowprovides content from more than 1,000 continuously updated audio topics, one of the largest audiocontent databases available on the Web.

Technology PartnersMotorola, Nuance, Webley

Content PartnersWall Street Journal.com, ABC News.com, Associated Press, Tribune Media Services

CustomersCentennial Communications


Interactive TelesisCEO, Don Cameronwww.interactivetelesis.com

The CompanyFounded in 1994, Interactive Telesis, based in San Diego, California, develops and hosts voice-enabling technologies for call center and customer relations applications. The company specializesin interactive voice response (IVR) services and deployment of automated speech recognition (ASR)technologies. Its solutions provide enterprises with a complete voice application solution includingspeech recognition technology, computer telephony equipment and telecommunications services.The company has received funding from Hambrecht & Quist Guarantee Finance.

Products and ServicesInteractive Telesis provides end-to-end voice-enabled services and solutions to enterprises. ItsVoiceVault service is a voice-hosting utility for enterprises that are seeking to voice enable theirWeb-based eCommerce or information services. InvestorREACH is an automated IVR systemdesigned for publicly traded companies as a supplement for the Investor Relations Web site. Record& Replay makes a digitally recorded teleconference available for playback via online demand. Thesesolutions use the VoiceXML language for speech recognition.

CustomersVerizon, Excite@Homea, Global Crossing, Jambatalk, Lucent, MCI WorldCom, Nike, Sprint, Yahoo!

PartnersNuance, SpeechWorks


Phonetic SystemsCo-Founder, Hezi Resnekovwww.phoneticsystems.com

The CompanyFounded in 1994, Phonetic Systems provides speech recognition technologies for directory access.Phonetic’s products are based on its core recognition engine, which uses advanced probability-based algorithms to perform searches on large databases (scalable to more than 1,000,000records). These solutions can be integrated into existing PBX and other call center systems forcustomer care and marketing applications. The company is headquartered in Burlington,Massachusetts, with its research and development office in Israel. Funding has come from DSPolaris Ltd., Magnum Communications Fund, Formula Ventures LP and Sadot Research andDevelopment Ltd.

Products and ServicesPhonetic Systems’ solutions enable automated attendant, directory assistance, information retrievaland transaction-oriented applications. The company’s PhoneticOperator platform provides access toInternet and eCommerce applications via speech. This platform gives enterprises the ability toautomate customer and account identification processes, retrieve information and even place orders.PhoneticPortal is the company’s enterprise solution PhoneticOperator can direct incoming andoutgoing calls, automate transaction processing for call centers or provide directory assistancewithin an enterprise. Phonetic’s Voice Search Engine is an IP-enabled platform that runs on theback-end of a server and is capable of interfacing with voice portals or directory assistanceapplications. The technology supports existing call center systems such as PBX and ACD.

CustomersPhonetic currently targets the call center, financial, education, medical, travel and telecom markets.The University of California, Santa Cruz has announced its use of Phonetic System’s PhoneticPortal.

PartnersSonera, Siemens, Natural Microsystems, Dialogic, Foresight Technology


Sky FlowCEO, Nibha Aggarwalwww.skyflow.com

CompanySkyFlow, founded in January of 2000, offers an ASP service platform to voice portal companies andenterprises that seek to deliver information to their mobile customers, employees and partners.SkyFlow grew out of the Berkeley Business incubator. Investors include Information TechnologyUniversity (ITU) Ventures (the VC arm of Pacific Capital Group), Silicon Venture Ltd., an investorgroup of managing directors from Goldman Sachs, two general partners from I-Group (an affiliate ofJapan-based Softbank) and managing directors from Pareto Partners. SkyFlow is located inEmeryville, California.

ProductsSkyFlow’s speech-recognition technology platform allows enterprises to use any communicationmedia to provide access to their applications, databases and Web content. With the SkyFlowplatform, enterprises can extend personalized information to mobile customers, employees andpartners or allow customers to conduct mCommerce transactions using voice commands.Transaction records and retrieved information can be delivered to any wireless device such as apager, wireless PDA and cell phone or wired device such as a regular telephone, fax machine or PCvia e-mail. The highly scalable SkyFlow platform allows expansion of capacity as well as the additionof emerging devices and technologies to those already supported by the platform.

PartnersSpeechWorks, Nuance

CustomersNone listed at this time


Talk2CEO, Brian Charlesworthwww.talk2.com

The CompanyFounded in 1998, Talk2 provides enterprises and carriers with a carrier-grade voice portal solution.Talk2’s voice infrastructure solution integrates into the carrier network and can mimic a company’scorporate firewall for security. Investors include Oraclea and Hewlett-Packard, Smart TechnologyVentures, New Media Venture Partners, Bluevector, Dominion Ventures, Sun America Investmentsand Thomas Weisel Partners. Talk2 is headquartered in Salt Lake City, Utah.

ProductsTalk2’s scalable architecture, ViPrNET is compatible with the network’s transport and control devicesso that the carrier can deploy voice services throughout its network. Using this architecture, carrierscan deliver voice-activated services such as corporate e-mail delivery and response, personalinformation and corporate data. The company’s sVPN (spontaneous Virtual Private Networking)technology extends the corporate firewall to the telephone allowing for security of corporate datawhen accessible via telephone. Core applications for this architecture include Talk2’s personalinformation management (PIM), messaging, directory assistance and location-based services.

TechnologyPartners include Oracle and Hewlett-Packard (also investors). Talk2’s architecture works in Unix, HPUX, IBM AIX and Suna Solaris environments and supports applications written in vXML.


TeleraPresident and CEO, Prem Uppaluruwww.telera.com

The CompanyFounded in 1998, Telera is a provider of ASP infrastructure services enabling businesses to delivervoice applications just as easily as they now deliver Web applications. Using Voice XML, Teleradevelops IVR operations, call routing and outbound customer relationship management. Telera’shosted solutions give enterprises the flexibility to outsource voice communications while staying incontrol of the application and information. These solutions include access to all help desks and callcenters to manage customer relations more efficiently. The company is headquartered in Campbell,California. Investors in Telera include: Amerindo, American Express, Bowman Capital, BerkleyInternational Capital and Intel.

Products and ServicesTelera’s hosted voice services give enterprises the ability to provide customers with eBusinesssolutions over the phone in the same way that other hosted services provide eBusiness functionalityover the Web. Applications include automated FAQs, catalogue “browsing,” and product availabilityqueries, account status and transaction processing. These applications can be driven by speech (or,more traditionally, touch-tone input). Telera’s Voice Web Application Platform delivers IVRfunctionality under the control of enterprise-based Web Application Servers. Also included inTelera’s product suite are Network Routing, Network-based call queuing, Outbound CustomerNotification and Management Reporting.

An example of Telera’s hosted service is its Sears’ car battery promotions project. This hostedservice answers customer queries about advertisements and allows Sears to count the inquiries itreceives on each promotion. This functionality cost the customer approximately $4,000–5,000 permonth. Pricing depends on the service, with varying degrees of application complexity and hostingcapabilities.

CustomersAribaa, California Casualty, Covad, Sears, JC Penney, National Airlines

PartnersCisco, Dialogic (an Intel company), Qwest, SpeechWorks, Interactive Intelligence, eLoyalty,Broadway & Seymour, Aspect Communications Corporation, Nuance and ACP Online


TellmeCEO, Mike McCuewww.tellme.com

The CompanyTellme was founded in February 1999 as a developer of automated information retrieval viatelephone and Internet. Headquartered in Mountain View, California, the company designs andoperates voice-activated services that connect an enterprise to customers, suppliers and employees.

Investors in Tellme include the Barksdale Group, Kleiner Perkins Caufield & Byers, BenchmarkCapital, AT&T, Attractor Investment Management, Amerindo Investment Advisors, Essex InvestmentManagement, ignition, Van Wagoner Capital Management, Bowman Capital, Octane CapitalManagement, Allen & Company and JNet.

Products and ServicesTellme is primarily known as a voice portal. Its interactive media service brings together thecapabilities of the Web and the convenience of the telephone. By dialing 1-800-555-TELL users canspeak simple commands and access information such as driving directions, soap opera updates,stock quotes and restaurant listings. The voice portal is built over Tellme’s Web-based VoiceXMLnetwork integrated with AT&T backbone.

Tellme’s business solutions allow clients to build voice-enabled versions of existing Webapplications. The company’s open, Internet-based platform allows enterprises to create interactiveapplications for its voice portal 1-800-555-TELL. Also, Tellme builds and hosts other voice serviceson a carrier-grade network that can support millions of calls.

Technology SupportedVoice XML, HTTP, SSL, Cisco ICN, Speech Recognition, VoIP and other open Internet standards

CustomersShopTalk Networks


uReachCEO, Krishnamurty Kambhampathiwww.ureach.com

CompanyUReach, founded in 1998, is a unified communications application service provider. Investors inuReach include Argo Global Capital Inc. and Banc One Equity Capital, which has allowed forsignificant expansion to telcos, CLECs wireless carriers, ISPs and portals. UReach is located inHolmdel, New Jersey.

ProductsThe uReach platform integrates different forms of communication technologies and devices (e.g.,phone, PC, Web-enabled phone and pager) with different communications means (e.g., calls, e-mails,voice mail and faxes) to provide consumers and businesses with an easy-to-use voice-enabledinterface. Through a personal 800 number or local access number, users are able to access a widerange of applications such as address book, calendar and to do list. UReach offers it services throughrelationships with ILECs, CLECs, wireless carriers, ISPs and portals.

PartnersiPrint.coma,b, Blue Mountain Arts, FreeAgent.com

CustomersBlue Mountain Arts


VerbalTekCEO, Dr. James Panwww.verbaltek.com

The CompanyHeadquartered in San Jose, California, VerbalTek develops technologies to enable voice recognitionover mobile devices including mobile phones and PDAs. The premise for developing mobile-device-specific recognition software is that text input is difficult over these devices and voice recognitionwould allow these devices to become truly unified communication devices. The company hopes tocapitalize on the difficulty of key entry for Asian character-based languages by providing quickaccess to information via spoken command recognition in Chinese, Japanese, Korean and otherlanguages to be developed.

Investors in VerbalTek include Panpal Consulting, Fortune Consulting Group, Infinity GlobalInvestments, Capital Asia, Southwest Asia Investment and Japan Asia Investment.

Products and ServicesVerbalTek’s solution leverages its speech recognition technology (developed at Stanford University)to give the mobile device user the ability to browse the wireless Web, dial phone numbers andeventually even compose and read e-mails with spoken commands.

• VerbalNET: This voice-enabled search engine solution allows service providers and handsetmanufacturers to provide end users with a specialized feature—the ability to retrieve Web-basedinformation via speech. This solution does not require a voice portal and the technology can beintegrated into any microbrowser including WAP, iMode and Windows CE Internet Explorer.VerbalNET supports multiple languages including English, Chinese, Japanese, Korean andGerman.

• VerbalDigit: This application allows voice dialing using natural speech in English or Chinese.

• VerbalCommand: This product is a command-based application that allows users to programcertain commands to be associated with certain phone numbers or applications. For example, auser could program the phone to call home when it recognized the phrase “Call Grover” or to findairline reservations when it recognized the phrase “I’m so jet lagged.”

PartnersTelepaq Technology, mvion, Sina.com, High-Tech Computer Corp., Acer, Palmax, Internova


VoiceGenieCEO, Vahan Kololianwww.voicegenie.com

The CompanyLocated in Toronto, Canada, VoiceGenie builds and deploys infrastructure that enables voice accessto Web content, personal communications and Internet transactions from any phone. In 1996,VoiceGenie began working closely with AT&T Labs to build a voice platform that enabled blindpeople to access the Internet through a voice interface over standard telephones. Now VoiceGenieoffers this solution to enterprises seeking to create valuable voice services for traveling professionalsor customer service applications.

ProductsVoiceGenie’s VoiceXML Gateway is a Web-enabled Computer Telephony Integration technologythat manages voice applications. It incorporates Automatic Speech Recognition (ASR) and Text-to-Speech (TTS) technologies with telephony interface cards to provide numerous functions for the enduser. This Gateway platform supports ASR and TTS solutions from many vendors including AT&TWatson and Nuance so that it is vendor independent.

VoiceGenie applications include personalized functionality and customer service applications suchas self-care, and account and service provisioning. Applications for the end user include callingservices (the VoiceXML Gateway can both receive and place calls), voice-activated dialing, e-mailby phone, reminder services and personal information services, such as traffic, news, sports,weather and a pizza-ordering service.

PartnersLucent, Dialogic, Nuance, SpeechWorks, Cable and Wireless, Sonus Networks

CustomersAT&T, Lucent, Openwave, Wildfire, Brience, Deloitte Consulting, Phone2Networks


VoxeoCEO, Gary Rebackwww.voxeo.com

The CompanyVoxeo provides middleware between the telephone network and the Internet to manage phoneapplications such as unified messaging and voice-based access to Web content. The company wasfounded in 1999 and has built a nationwide network to run its phone-based software. Voxeo isfunded by Crosspoint Venture Partners and Mayfield.

ProductsVoxeo has built a network that runs from Boston to Los Angeles with 10 redundant call centerslocated across the United States. The company plans to use this network to provide access via anyphone to specialized voice application servers. This technology can be used by Internet businessesto leverage their Web-based content and services or by voice portals and voice-based e-mailretrieval systems. This network has the capability to allow local service to 150 U.S. cities andnationwide access to 800 and 900 numbers.

In addition to its network, the company provides services and solutions to allow easier developmentof applications for the phone, including voice recognition, Interactive Voice Response (IVR)applications and instant notifications. Because applications can be written in phone markuplanguages such as VoiceXML, Microsoft WTE and CallXML, Web developers at enterprises can setup voice applications tailored to an individual corporation’s needs.

PartnersBecause many of its customers have applications hosted by Exodusa,b and AboveNet facilities,Voxeo has built Voxeo.net into every AboveNet and Exodus facility. Voxeo.net is a Cisco-powerednetwork. Partners include Allairea,b, RadVision, SilverStreama,b and Snowshoe Networks.

CustomersJust out of stealth mode, the company indicates it has more than 15 customers including Postini, ane-mail-retrieval company


WavemakersCEO, Peter van der Grachtwww.wavemakers.com

The CompanyWavemakers develops and markets software that improves the accuracy of speech recognitionthrough proprietary noise-reduction technology. Founded in 1993, this Canadian company has 23employees (one-third of which are PhDs). VC backers include Working Opportunity Fund andVentures West.

Products and ServicesThe company’s product, CLEARSTEAM, separates speech from background noise and interferenceto allow speech-recognition software to work more accurately. The product is unique because it canwork using only one microphone, which makes it viable as a handset or PDA solution. Wavemakers’closest competitor is Clarity, which uses two microphones in its solution, but Wavemakers believesClarity is also a partner as they are more focused on improving voice quality.

Technology SupportedThe company plans to bundle their software with a variety of components used in speech applica-tions, including microphones, speech-recognition software, operating systems and computer chips.


Webley SystemsCEO, Pat Mathiswww.webley.com

The CompanyWebley Systems, Inc., founded in 1997, provides unified communications and messaging servicesand solutions to voice portals and enterprises. Its “Personal Assistant” gives users access topersonal and corporate communications all in one place, over the phone or over the Web. Thecompany’s headquarters are located in Washington, DC. Investors in Webley include PatricofVentures, Forstmann Little & Co, AOL Investments and Net2Phone.

Products and ServicesWebley’s Personal Assistant is truly an automated assistant that calls a user to deliver all importantinformation and calls, in real time. It automatically sorts voice mail, faxes and e-mail in order of presetpriorities and can screen calls, set up conference calls and do voice-activated dialing from anextensive address book. Via a personal Web page, customers can upload and synchronize PIMaddress book, retrieve/forward messages and set up conference calls. Webley employs text-to-speechand voice-recognition technologies from companies like Indicast to provide business efficiency.

Webley offers both a consumer service and a more comprehensive corporate service. Theconsumer service is priced on a per-month and per-minute fee basis. Each user is given an 800number and the service costs $14.95 per month and $0.06 per minute used on the 800 number.When making calls, Webley charges $0.05 per minute and conference calling costs $0.06 perminute for each line included. The corporate service acts as a receptionist that keeps all teammembers in contact all of the time. The Webley Corporate assistant can set up conference calls andtrack down mobile professionals. It also keeps track of corporate e-mail, voice-mail and faxes.Pricing on the Corporate Assistant is approximately $29.95 for an operator box and then $14.95 pereach additional “sub-box.” Per-minute fees are the same as above.

CustomersYellowpages.com and individual users.


WebversaCEO, Janet Wyliewww.webversa.com

The CompanyWebversa develops voice-enabling solutions for enterprises that enable mobile professionals tohave anytime anywhere access to Web sites, databases and corporate applications by voicecommand. The company’s headquarters are in Fairfax, Virginia. Founded in 1997, Webversa closedits first round of funding in September 2000 with $6.3 million. Investors include Redleaf Group,Avatar Capital, Capital Investors and Intel Communications Fund. In addition, VentureBank@PNCrecently announced that it would provide working capital financing for Webversa.

Products and ServicesWebversa aims to extend eBusiness beyond the PC and laptop. Using Webversa’s enablingtechnology, users can navigate Web sites and corporate databases from any telephone and willhave real-time content read back to them. The Webversa solution enables a two-way, voice-interface to retrieve, modify, manipulate and manage corporate data remotely. Webversa licensesthis technology to enterprises as well as providing a hosted service for lower capital outlay.

PartnersNuance, Intel Online Services and Dialogic (an Intel Company), SpeechWorks

CustomersPenguin Radio, i411, Alerts.com, Inphomatch

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Robertson Stephens Research Coverage Dire ctor of U.S.Research Barry Tarasoff 415.693.3442

I N T E R N E TBusiness-to-Business eCommerce

Eric B. Upin 415.693.3441Carey L. Jennings 415.248.4025Michael J. Beckwith 415.248.4540

Betty Y. Chen 415.248.4440Kristen B. Schaeffer 415.623.7543

eCommerce Infrastructure ServicesRichard A. Juarez 415.248.4660Michael T. Alic 415.248.4304

Chetan S. Karkhanis 415.248.4711Brett D. Johnson 415.623.7542

eConsumerLauren Cooks Levitan 415.693.3309Michael Cibula 415.693.3467

William Urda 415.676.2868Arthur Wu 415.248.4717Melissa Tang 415.623.7540

eCredit & Lending/I-AutoJordan Hymowitz 415.248.4610

Michael Gaul 415.248.4851eFinance

Scott W. Appleby 415.248.4202Richard B. Shane Jr. 415.693.3519Daniel P. Meyer 415.248.4715

eHealthSheryl R. Skolnick, Ph.D. 212.407.0418

Martine Gilbert 212.407.0294Chantelle Streete 212.407.0273

eProcessing/ePaymentAndrew W. Jeffrey, CFA 415.676.2731Mort Sebt 415.248.4254

Dan Fannon 415.676.2732eServices

Steven S. Birer 415.248.4091Joseph A. Vafi 415.248.4977

Gregory J. Zwakman 415.248.4038Douglas N. MacBean 415.248.4888

European Internet and eCommerceDerek J. Brown +44 (0) 20.7798.6380

Stephen A. FarrugiaInternet & eCommerce Applications

Alex W. Baluta 415.676.2713Andy Savitz 415.693.3542Mark Perutz 415.248.4970

Internet and New MediaLowell J. Singer 415.676.2769A. Sasa Zorovic, Ph.D. 415.248.4737

Kevin Samuelson 415.248.4078Arthur Wu 415.248.4717

Knowledge TechnologiesCindy Hope Hatstadt 212.407.0292

Christine V.Shim 212.407.0293Wireless Data/eCommunications

Marianne Wolk 212.407.0427Candace Bryan 212.610.6109

Malindi Davies 212.407.0286

T E C H N O L O G YCommunications/Networking

Paul Johnson, CFA 212.407.0415Ara Mizrakjian 212.407.0406Peter Carrillo 212.407.0444

Sachin Divecha 212.407.0404Eileen M. Segall 212.407.0402

Communications/NetworkingPaul Silverstein 212.407.0440

Eileen M. Segall 212.407.0402Sachin Divecha 212.407.0404

Communications Components/Semiconductor DevicesArun Veerappan 415.693.3391Tore Svanberg 415.248.4266Victor Lim 415.676.2707Igor Ilic 415.693.3440

Eugene Seki 415.693.3307Jeremy Kwan 415.623.7544Terence WhalenTom Lavia

Design Enabling TechnologiesJohn O. Barr 212.407.0477

Lucas BianchiElectronic Manufacturing Products and Services

J. Keith Dunne, CFA 415.676.2756David Alonso, CFA 415.248.4311Ofer Grinbaum 415.693.3274

Energy Technology and ServicesEric A. Prouty 415.693.3485

Lisa M. Callahan 415.248.4738European Communications/Networking

Carmelo Bonaccorso +44 (0) 20.7798.6369Nicklas Gustafsson +44 (0) 20.7798.6377

European MediaMichael Graham, CFA +44 (0) 20.7798.6360

Paul Oppenheim +44 (0) 20.7798.6678Arthur Wu 415.248.4717

European Semiconductor Capital EquipmentScott Ingham, Ph.D. +44 (0) 20.7798.6378

European Semiconductor Design and DevicesGary Kelly, ACA +44 (0) 20.7798.6370

T E C H N O L O G Y c o n t .European Technology Services

Jason D. Brueschke +44 (0) 20.7798.6391Network Storage Systems and Software

Dane E. Lewis 415.248.4071Connie Pon 415.248.4890Evren Dogan 415.248.4705

Semiconductor Devices/Computer Systems/StorageEric Rothdeutsch 415.693.3241Peter M. Karazeris 415.676.2865Tai Nguyen

Neal R. Gorenflo 415.248.4959Semiconductor Equipment/Foundries

Sue Billat 650.289.7226Suresh Balaraman 650.289.7228

Heidi Poon 650.289.7229Emma Park 650.289.7217

Wireless Data/eCommunicationsMarianne Wolk 212.407.0427Candace Bryan 212.610.6109

Malindi Davies 212.407.0286

T E L E C O M S E R V I C E SEuropean Telecom Services

Bill Dixon +44 (0) 20.7798.6363Telecom Services

Jim Friedland 415.248.4940Ryan D. Weidenmiller 415.676.2849

H E A L T H C A R EBiopharmaceuticals

Jay B. Silverman 212.407.0420Eric Shen, M.D. 212.407.0269

Jia Yang Biopharmaceuticals

Michael G. King Jr. 212.407.0248Edward A. Tenthoff 212.407.0272Steven D. Harr 212.610.6130

Ellen A. Lubman 212.610.6104European Life Sciences

Sam Williams, Ph.D. +44 (0) 20.7798.6385Karl Hanks

Health Care ServicesSheryl R. Skolnick, Ph.D. 212.407.0418

Martine Gilbert 212.407.0294Chantelle Streete 212.407.0273

Large Capitalization/Specialty PharmaceuticalsRobert C. Hazlett III 212.610.6101

Jason Cohen 212.610.6171Medical Devices/Medical Technologies

Wade H. King, M.D. 415.693.3434Christine M. Pui 415.248.4325Anjali Shah 415.248.4583

R E T A I L I N G / C O N S U M E R P R O D U C T SBroadline Retailing: Discount and Department Stores

Bill Dreher 212.407.0413Multichannel Consumer Hard Goods

Alexandra M. DalPan, CFA 212.407.0434Carolyn M. Capaccio, CFA

Aleksandra Mandich 212.610.6112Specialty/Apparel Retailing

Janet Joseph Kloppenburg 212.407.0410Meghan M. Crotty 212.407.0250

Carla M. Funari 212.407.0298Elizabeth A. Montgomery 212.407.0243

R E S T A U R A N T S / F O O DRestaurants/Food

Andrew M. Barish 415.693.3429F. Fitzhugh Taylor III 415.248.4676

Matthew G. McKay, CFA 415.693.3249

R E A L E S T A T EREITs/REOCs/Real Estate Services

Jay P. Leupp, CPA 415.693.3575Paul R. Penney, CPA 415.693.3523

David T. Copp 415.248.4204Jeffrey L. Mayer

G A M I N G & L O D G I N GGaming & Lodging

Harry C. Curtis, CFA 212.407.0251Smedes Rose 212.407.0408

Gloria Fu 212.610.6111

S E R V I C E SFinancial Services

Justin Hughes, CFA 415.248.4595IT Services

Steven S. Birer 415.248.4091Joseph A. Vafi 415.248.4977

Gregory J. Zwakman 415.248.4038Douglas N. MacBean 415.248.4888

Global Director of Research John Rohal 415.693.3244U.S. Director of Research Barry Tarasoff 415.693.3442

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Marianne WolkMarianne, a managing director, specializes intechnology solutions for the convergingcommunications industry. Her areas of expertiseinclude communication software and services such aswireless data and telecom operation support systems.Marianne has had a decade of buy- and sell-sideresearch experience in the technology industry.Marianne is a Wall Street Journal All-Star Analyst andhas been ranked by Greenwich Associates as aleading industry analyst. Marianne received a BA inapplied mathematics from Northwestern Universityand an MBA in finance and economics from theUniversity of Chicago.

wireless data: speaking upreplace more expensive, people-based call centers and tedious tone-tone...

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