February 1, 2001 Technology Research

Wireless Data: Speaking Up

Speaking 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 SUMMARY Overview...... 3 Investment Thesis and Recommendations...... 4

SECTION II. THE VOICE MARKET Voice Solutions Market Likely to Reach at Least $5 Billion by 2005...... 11 Diverse Markets for Voice Solutions...... 12 Enterprise...... 13 Telecom ...... 16 ...... 17 Expanded Distribution Strategies Track the Evolution of Speech Applications and Markets ...... 19 Voice XML, an Emerging Standard for Application Development...... 22 Onset of Standards Could Alter the Value Chain of the Voice Market...... 23

SECTION III. VOICE TECHNOLOGY Voice-Enabling Technologies, at the Core ...... 29

SECTION IV. VOICE VENDORS Nuance and SpeechWorks Enjoy Accelerating Growth and Significant Barriers to Entry...... 35 Public Company Profiles ...... 37 Private Company Profiles ...... 79 SECTION I. INVESTMENT SUMMARY

Robertson Stephens, Inc. 1 Overview

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

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

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 to application-centric sales • the effect of open standards, such as VoiceXML, on the value chain in the voice market and 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 interface technolgies

Our final section identifies public and private vendors that we believe are positioned for success in the 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 information regarding branded voice portals and voice commerce.

Robertson Stephens, Inc. 3 The Human Side of Computing: Voice Is at the Cusp of a Major Investment Cycle, Widening the Promise of the Wireless Internet

In our opinion, voice is the next killer application, poised at the start of a major new technology investment cycle. Though speech technology is not new, we believe vast improvements in the accuracy and performance of speech recognition engines coupled with the skyrocketing growth of Internet 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 for telephony-based Internet services. In particular, we believe voice is the killer application for the wireless Internet, handicapped currently by small screens and inadequate data input devices. Those caught pressing 999-2-44-666-666 into a touch-tone dialing system to spell “Yahoo” or clumsily using your thumbs to type a simple sentence on a two-inch keyboard should appreciate the vast improvement offered by voice. Major improvements in voice technology, including broader support for complex vocabularies, languages, accents noise, natural language (uh-huh) and performance above the 90% mark, voice solutions are no longer just a dream. Buoyed by a potential base of one billion wireless users seeking Internet access by 2002, approximately 4x today’s keyboard-centric PC Internet users, the voice market is at the cusp of a major investment cycle, which we already measure at approximately $1 billion.

Accuracy and usability are improving speech’s usefulness in mainstream settings. Speech-to-text technology has been available since the early 1980s but its popularity has seen a major step forward over the few years as its efficacy has risen. At present, companies like SpeechWorksa, Philips Speech Processing and Nuance Communicationsa offer speech recognition (speech-to-text) technology featuring dramatic improvements in accuracy. According to Forrester Research, the combination 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 telephone access). Newer speech recognition systems also feature interruption (barge-in), natural language (open-ended conversation) and noise reduction and filtering mechansims—some of the “missing links” that drove accuracy below 50% in earlier versions (at least one miss per sentence uttered). In addition, new compressor/decompressor (codec) software has reduced bandwidth requirements. As a 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 customer purchasing criteria, which short lists the aforementioned vendors based on accuracy and then quickly turns to factors ranging from computing requirements and vendor to applications, service and time to market.

From dial-tone to voice-tone, voice is revolutionizing the way telephone networks are used. With advanced speech recognition, voice-directed dialing is becoming a reality. Enterprises and carriers alike have already deployed simple applications for tasks such as voice-directed call routing. These applications often replace legacy touch-tone systems that required the calling party to “spell” the name of the person they sought (e.g., press 5,6,3,7,6,4,8,4 for Joe Smith). Newer applications are far more responsive, allowing systems to recognize spoken phrases such as “Call Joe,” and then probe further to see if the user wants to “Call Joe Smith or Joe Green” and then may even ask if you want to call him “at home, mobile or office” before routing the call to the selected number. Looking into our crystal ball, we believe the real nirvana for the voice market is “voice tone”—where, much like 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 speech recognition system instead of a busy live operator.

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

4 Robertson Stephens, Inc. been driven by enterprises and communication service providers as they seek to automate and replace more expensive, people-based call centers and tedious tone-tone systems. Call center costs can 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 $0.09 for a speech recognition port. In addition, to reduced expenses, voice-based systems improve customer acquisition, retention and loyalty by improving hold times and faster destination access. SpeechTechnology indicates surveys find more than 80% of consumers using speech systems are satisfied 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 a seeminglessly endless number of multiple-choice questions and abandon rates of 60%. • more friendly to navigate, featuring natural language rather than pre-recorded and finite options.

Calling the Internet just got simpler. Everyone knows how to give voice commands, making everything from dialing, to browsing the Internet, to requesting directions or sport scores much easier. Thus, the advances of voice technology coupled with widespread Internet use (250 million worldwide users forecast to reach at least 600 million by 2003 by IDC) has led to the first implementations of the voice Web. New voice-based information services and voice portals such as Quack/AOL, Tellme, BeVocal, HeyAnita, Talk2.com and Audiopoint are now 30–50 strong according to the Kelsey Group. Advertising supported and fee-based voice services offer telephony-based access 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 use Internet 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 data services, we believe wireless data has finally become a reality. We estimate that 5% of the approximately 600 million worldwide wireless subscribers access the Internet from their wireless phones in 2000 and project that figure could climb to 40–50% of the projected 1.2 billion wireless subscribers doing so by 2003. To date, the proliferation of wireless data has been hampered by many 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 handset availability should improve significantly with GPRS introductions in Europe, 3G introductions in Japan 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 content and applications comes to market. Amidst this backdrop, we view voice as the killer application to take wireless data use from short-messages, e-mail or the occasional game to a daily habit. Voice alleviates the difficult navigation caused by small screen sizes and the shortfalls of today’s cumbersome 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 text messages with text-to-speech. Moreover, Internet penetrations may finally broaden beyond the computer-literacy rate (an installed base of more than 450 million PC users worldwide) to include the larger universe of 600 million wireless and 1 billion wireline phones globally.

Robertson Stephens, Inc. 5 …and a beneficiary and benefactor of carriers’ WAP offerings. We expect voice-enabling technologies 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 data utilization. In these cases, we believe voice will be the preferred interface. In other instances, voice will be a less compelling interface than a keyboard or stylus for mobile subscribers. When users’ choices are numerous (>5–10 options), it is easier to visualize menus than remember them and a keyboard or stylus 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 data solutions. For example, a driver seeking directions may wish to request them vocally, but prefer to receive them as text or, better yet, a graphical map. To that end, drivers and in-vehicle data access is a compelling market for hands-free voice interfaces to the Internet. With estimates that 70% of all wireless calls being made while driving (by GM and ABI), there have been several initiatives by local authorities to ban in-vehicle wireless use (35 states have considered such bills since 1995) and the U.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 new realm of possibilities from Voice Commerce (vCommerce) by wireless and wired telephony users to Mobile Commerce (voice-in, data-back, mCommerce). Using a telephone and a (a server-based user-interface requiring no change to the telephone), a caller can ask for a train schedule for Monday from New York City to Philadelphia and receive a human-like response asking the caller if they would like to purchase a ticket. The same features are already available for movie tickets (try AOL’ portal, the owner of MovieFone) or stock purchases (via eTradea,b, Schwab and Fidleity). According to ABI, the global market for vCommerce should expand from $2.3 billion in 2001, 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 be a significant growth year for voice-enabled applications, as these user-friendly solutions are adopted by new enterprises, service providers and Internet customers, and existing users proliferate new revenue-generating and cost-saving applications througout their organizations. In the enterprise market, Fortune 1,000 companies, including American Airlines, Federal Express, Fidelity, Merrill Lynch, United Airlines and UPS, are currently using speech to improve customer satisfacation and loyalty and to reduce costs. We expect these deployments to accelerate as application development times are cut by the introduction of packaged software (such as the dialog modules offered by Nuance and SpeechWorks) and the body of trained developers and systems integrator explodes with 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

6 Robertson Stephens, Inc. …and the race has begun to win the voice Web. We see a race by established Internet players such as AOL, Lycos and Yahoo!a to voice-enable their services as they strive to keep pace with the efforts of new entrants offering pure-play services (BeVocal, HeyAnita, Tellme) and the onset of wireless voice portal services from AT&T Wireless, Bell South and others offer wireless carriers and voice portals more opportunities for network utilization, customer retention, higher minutes of use and increased revenue generation. Allied Business Intelligence (ABI) predicts at least 71 million voice portal users in North America by 2005 up from 4.4 million users in 2001, with a concurrent shift from wireline (75% in 2001) voice portal usage to wireless (75% of users by 2005) usage. The challenge is to create compelling applications and information sites supporting voice access, moving from basic options sites (horoscopes, shopping, sports, weather, calendar/appointments, e-mail, news, traffic and directions) to a typical portal’s 100-plus links. The advent of VoiceXML, an emerging standard that enables voice portals to hyperlink users to other voice sites (and then return them back again), should mean 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 of the voice market suggests it approaches a $1 billion market at present, spurred by voice-enabling technology (such as speech recognition), applications (such as call routing or customer service) and services (portal, hosting and systems integration). Our thesis is that vast improvements in voice technology and the widespread adoption of wireless and Internet services will lead to broad-based adoptions of voice soltuions over the next several years. In addition, the onset of standards such as VoiceXML (vXML) should lead to exponential increaes in voice-enabled Internet sites and voice applications. 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 from equipment- to application-centric models (typical of an emerging market gaining solid footing). As the voice market expands, it moves outside the influence of equipment vendors (VRUs) with entrenched positions within call centers. When the voice market was more narrowly defined as a call center replacement 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 has expanded to encompass a wider range of applications within enterprises, carriers and Internet vendors, shifting purchase decisions to the performance of the recognition engine, time to market and the range, usability and availability of voice applications. Thus, along with a fivefold expansion of the voice market over the last few years, there has been a shift away from embedded applications tied to a VRU vendor’s proprietary application development efforts. Instead, custom and pre- packaged applications designed by voice technology vendors, third-party packaged application developers and custom systems developers currently flourish. Tracking these trends, leading technology vendors such as Nuance and SpeechWorks, have developed and marketed their own applications 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 standard for voice application development backed by Motorola, Nokia, Ciscoa, Lucent, IBM, AT&T, Philips and the World Wide Web Consortium (W3C). Because vXML is based on standard extensible markup language (XML), it should broaden the voice development community well beyond today’s base and accelerate the proliferation of voice applications. We also view vXML as a major positive for Web portals and other Internet information providers because it should provide them a way to expand the reach of their content/services from the 250 million global PC-Internet users to the larger universe of telephony access devices—both wireless and wireline, 1.6 billion in 2000. Though portals 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 the emerging vXML standard.

Robertson Stephens, Inc. 7 …stressing the performance and usability of the voice , where Nuance and Speechworks excel. VoiceXML uncouples the voice application from the voice-processing technology (i.e., speech-recogntion technology and equipment). In this open environment, performance advanatages (i.e., the 97–98% satisfaction with Nuance and SpeechWorks’ recongition engines), and close ties to application and professional services organizations will become just as critical to a voice technology vendor’s success as VRU vendor realtionships were in the past. More important, the key to acceptance of voice applications has always been a user-friendly, effective user interface, where Nuance and SpeechWorks excel. Regardless of who designs and deploys voice applications (or provides the speech recognition engine), this remains true. These vendors, already marketing Nuance Voyager and SpeechWorks’ VoiceXML Browser (via its Open Web Initiative), have a strong advantage in the interface market. First, they have multiple years of experience in developing effective user-friendly interfaces—no small task. Second, users are already accustomed to these interfaces via hundreds of applications deployed throughout financial service, travel, manufacturing and distribution, and Internet industires. Thus, we believe Nuance and SpeechWorks, leaders in the voice technology market, will dominate the market for voice interfaces.

We recommend investment in the shares of technology infrastruture vendors Nuance and SpeechWorks, positioned for accelerating growth backed by solid barriers to entry. We believe Nuance and SpeechWorks (along with Philips Speech Processing, a subsidiary of Philips Electronics) dominate the fragmented market for voice infrastructure technology (i.e., speech recogntion, text-to-speech and speaker verfication) where barreirs to entry are high. Although we do expect at least one other vXML-compliant speech-recognition to hit the market over the next 12–18 months, we believe Nuance and SpeechWorks will maintain their leadership positions. Advanced telephony-oriented speech recogntion engines include a self-learning feature that ensures these vendors realize exponential returns to their growth. In essence, the more the recogntion engine is used, the smarter it gets because the statistical algorithms in their solutions have more examples to choose from. Thus, the performance gap widens for potential new entrants with each sale of these vendors’ 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 value chain. Already offering robust user interfaces in combination with speech recognition, we expect these vendors to supplement these offerings with application development and deployment expertise. With hundreds of blue-chip deployments by all of these vendors, we believe both performance, references and experience on are on their side.

We also believe several private voice application providers and portals are well worth watching. As detailed in Section IV of our report, we believe several companies are well postioned at this early stage 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

8 Robertson Stephens, Inc. SECTION II. THE VOICE MARKET

Robertson Stephens, Inc. 9 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 currently estimated at approximately $1 billion and forecast to reach $5–10 billion worldwide by 2005. The market 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)

Average Growth 1998 1999 2000 2001E 2002E 2003E 00–03E 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 voice solutions. Data Monitor points to infrastructure alone as a $1.2 billion market by 2004, a far cry from the $11 billion infrastructure software projection by the Kelsey Group by 2005. Either infrastructure forecast may be broadened to include a wide array of voice applications, implementation and subscription services, as described in great detail in the following section of this report. Customer Relationship Management (CRM) applications, a target market of voice vendors, is projected to reach $10 billion by some, $45 billion by others, while the market for voice portals is projected to reach $5 billion—both by 2005. ABI projects the vCommerce market, including transactions via voice portals (voice-only such as HeyAnita and Tellme and voice-enabled such as AOL and Yahoo!), to reach $50 billion in the same time frame.

Our own analysis reflects a top-down and bottom-up effort at sizing the voice market, inclusive of infrastructure 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 technology sales are driven by ports, not end-user devices, which rise and fall with the number of applications used per subscriber and the number of simultaneous users of these voice applications. For example, one port may support 200–300 subscribers for voice dialing but once additional solutions are deployed—such as a voice browser—capacity could be reduced 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 the voice portal market vary greatly with the forecasters’ outlook for voice advertising and vCommerce, subscription or retail dollars created by voice portals. We believe a variety of

Robertson Stephens, Inc. 11 business models will emerge over time, both subscriber and usage-based, as voice applications proliferate enterprise, carrier and Internet markets. • We supplement our top-down analysis with a bottom-up approach, reflecting the current operations of the players we have identified in the voice technology (speech recognition, speech synthesis, speaker verification), voice applications, voice services (hosting and implementation) 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 enterprise market, accounting for approximately 50% of revenues to date. Telco demand is presently accelerating and is likely to contribute approximately as much revenue as enterprise over the next year 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 Center Operator and Call Call Center Replacement Center Replacement Replacement

Call Inquiries CRM CRM CRM vCommerce mCommerce mCommerce, Voice Portals and vCommerce

Market Share 40–60% 25–30% 15–30%

Source: Robertson Stephens.

12 Robertson Stephens, Inc. 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. Enterprises have primarily utilized these solutions to deploy voice-enabled customer support applications, replacing expensive labor-intensive call centers with less expensive automated solutions. Additional deployments have often centered around call management applications, which route calls based on a spoken request for an employee’s name rather than by spelling the name on a touch-tone system or 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, customer support and call center application spending total $1.3 billion, representing approximately 2.5% of total enterprise application spending. IDC forecasts growth of at least 60% annually to $11 billion by 2003. This is a subset of the overall CRM market forecast to grow 30% to $45 billion by 2003. Given the extent of their customer support requirements, accelerating as competition and new technologies like the Internet reduce loyalty, we believe enterprises will be motivated to increase customer satisfaction and operating efficiencies. Voice-based natural language CRM systems improve time to market and ease information access relative to complex touch-tone menus or operator-based systems (not generally available 24/7). In addition, speech-enabled call routing is more efficient in directing the call to the right department and is a more manageable way to minimize service time for customer service centers. Thus, organizations may turn to these voice applications and away from call centers to improve customer satisfaction and their return on investment.

Our analysis suggests voice-enabled applications accomplish both feats—improved cost efficiency and customer satisfaction. Speech recognition systems have been found to reduce call center costs by 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 cost as little as $0.10 to $0.85. The cost reduction with speech recognition is achieved through the elimination of expensive personnel, more efficient handlings of calls, lower overhead costs and lower per call costs. Our own analysis demonstrates an average per call savings of $0.86 over a four-year period, 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 three minutes for both. The calls per year are based on a 50-week year for agent calls (assumes holidays/vacation/sick time) and a 52-week year for speech-enabled calls. Annual costs for agents are based on salary and training costs (no additional fees are considered for benefits or overhead per agent), with annual cost of living assumptions of 3% starting from an initial salary of $30,000 and flat training assumptions of $1,000 per annum. First-year costs for speech-enabled calls include a service and equipment component ($6,250 equipment/$1,390 service), while additional years assume only service costs.

Robertson Stephens, Inc. 13 Figure 3: ANNUAL COSTS OF CALL CENTER CALLS—AGENT VERSUS PORT Speech-Enabled Call Agent Call (per port)

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

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

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

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

Year-Four Cost $33, 782 $1,389 Cost 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 service companies. Initial deployments tend to begin in one business segment or department (like a brokerage 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, which launched a speech recognition system for employee flight requests in 1997 in order to refocus reservationists’ time from 1.5 million employee calls per year to external customer requests. With a success 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 flight arrival/departure information. Thus, speech technology vendors see strong growth from existing customers (upward of 50%) from increased usage of current applications (which drives new port sales) and new application sales. We believe enterprise customers demonstrate fairly linear buying patterns 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 pricing structure. Voice vendors are able to leverage this model as customers demand richer content and/or applications. Richer applications require more bandwidth, reducing the capacity of each port. For instance, if one port could support 200–300 subscribers for stand-alone voice dialing, then the addition of another application, such as voice browsing, could reduce capacity to 20–30 subs per port. Although pricing varies across the industry, we estimate the per-port price for the voice technology software falls between $500–800. We believe the market is currently at a stage where fewer applications are present, requiring smaller port purchases, but as the industry develops and applications become more readily available, the per-port capacity restraint should result in larger license 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.

14 Robertson Stephens, Inc. Figure 4: ENTERPRISE VOTES ARE SPLIT BETWEEN NUANCE AND SPEECHWORKS

Vendor Customer Partner Application Financial Services Nuance Charles Schwab NA Voice-recognition retail brokerage services and user voice authentication Fidelity Voice-activated brokerage transactions

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

Philips American Express NA Voice activation of credit cards Aetna 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 Airlines NA Speech-enabled flight information and employee Continental Airlines reservation

Philips Swedish Railways NA Speech-enabled train information Other: Nuance Home Shopping Network Edify Speaker verification system UPS NA Nationwide, voice activate, automated package tracking system Ernst & Young Lyrix Voice portal

SpeechWorks Federal Express Nextlink Interactive Speech-enabled customer service

Philips Premiere World NA Voice-enabled pay-per-view (Germany/Austria) Jaxx Lottery Phone NA Speech-enabled lottery game (Germany) Source: Company reports.

Robertson Stephens, Inc. 15 Telecom—A Major Opportunity for Voice Solutions

In our view, the telecommunications carrier market is the fastest growing for voice vendors and should surpass enterprises for total spending sometime in the next 3–5 years. We believe this explosion is being fueled in great part by wireless carriers that continue to seek new sources of subscriber revenue and greater customer retention. Voice solutions allow carriers to offer several benefits to end users, including voice-activated dialing, spoken access to e-mail and, perhaps most notably, they allow carriers to create voice portals for easier information access on wireless devices handicapped by small screens and tiny keyboards. The deployment of these services are aimed at encouraging 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 to build customer retention.

How does voice-enabling technology work with wireless data platforms deployed by carriers? We expect voice-enabling technologies 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 data utilization. In these cases, we believe voice will be the preferred interface. 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 them as 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 are numerous (>5–10 options), it is easier to visualize menus than to remember them. 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.

We believe a variety of business models will emerge as carriers deploy a rich portfolio of voice services. 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 monthly subscription fees, advertising revenues or collect vCommerce fees similar to the transaction fee or revenue sharing models currently on the Internet. We believe several voice technology vendors have already 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 Application Nuance Telus Voice interface to conventional IVR applications and Internet content Sprint PCS Voice dialing

SpeechWorks BellSouth Voice portal MCI WorldComa NA

Philips AT&T Wireless Voice dialing British Telecom Voice-enabled Directory Assistance Omnitel Voice portal Portugal Telecom Voice-enabled collect calling

Source: Company reports.

16 Robertson Stephens, Inc. 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 information available to them at a desktop via any wired or wireless phone, a three- to fourfold increase in information access devices.

To generate new revenues, Internet companies can improve the breadth of their product offering by expanding beyond eCommerce and mCommerce to vCommerce. We believe eCommerce comes full circle with voice, finally allowing consumers to order products or buy new services via any phone—wired or wireless—anytime, anywhere. An example of vCommerce is depicted by a user opting to call .coma and place a secure order from their home phone (secured by speaker verification), eliminating the need to boot their computer and dial into the Internet. Alternatively, a user may wish to use their cellular phone to check on the status of an order while they are commuting home from work. The combination of security via voice authentication and the ease of use should stimulate the growth of vCommerce in the traditional eCommerce user base and introduce non-traditional commerce into a new market segment. The worldwide market for vCommerce is expected to more than double in the next two years to $4.7 billion in 2002 and exploding to more than $50 billion by 2005 from $2.3 billion in 2001 as voice technologies penetrate carriers and portals (ABI). Growth should be bolstered by the congruent growth in voice sites, which currently 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 voice information access associated with voice portals), Internet companies are likely to deploy speech applications within their customer service centers to reduce operating costs and improve customer loyalty. We believe Internet companies are trying to stay ahead of their “mortar” competition by offering customers greater convenience and pricing—both fostered by voice technologies.

We believe voice infrastructure pricing to portals is initially tracking the models utilized by carriers and enterprises—priced generally on a per-port basis. Several vendors, such as SpeechWorks in its contract with AOL, have also formed revenue-sharing agreements with portals to supplement port fees with usage-based revenues. In turn, we believe traditional Internet portals will offer voice services 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 flat monthly charge of $4.95. Alternatively, pure-play voice portals currently are typically free to consumers 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.

Robertson Stephens, Inc. 17 Figure 6: INTERNET CUSTOMER OVERVIEW

Vendor Internet Partner Service Nuance Lycos Mobilee Voice Portal ShopTalk TellMe Voice commerce platform for shopping TellMe NA Voice portal BeVocal NA Strategic marketing and development agreement for voice- driven content and services

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

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

talkingweb NA Voice-enabled Web browsing (Germany)

Source: Company report.

18 Robertson Stephens, Inc. Expanded Distribution Strategies Track the Evolution of Speech Applications and Markets

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

Voice Response Unit Vendors—A Savvy Distribution Strategy at the Forefront of the Voice Market Vendors of core speech recognition engines, such as SpeechWorks and Nuance, benefited early on by 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 replacement market, by leveraging the pre-existing relationships of VRU vendors, like these, with call center operators. VRUs have long been positioned between the telephone network and back-office systems to perform tasks such as managing call flows, responding to a call with a pre-recorded message and developing 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 and SpeechWorks as they sought to market core speech-recognition engines to automate touch-tone and other call-center functions. Likewise, as independent software vendors (unallied to a particular equipment vendor like IBM or Philips), Nuance and SpeechWorks emerged as the partners of choice for VRU vendors. Within this market, VRU equipment manufacturers designed and integrated basic voice applications utilizing speech recognition engines and toolsets from third-party speech vendors such 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 experience curve of these statistical models, experienced major gains in performance and accuracy. In particular, Nuance and SpeechWorks developed strong branded presences on par with, or greater than, 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 Center As the voice market expands beyond the call center, it is moving outside the influence of the VRU vendor. Where speech vendors were chosen in the past almost entirely because of their relationship with an entrenched equipment vendor within a call center, purchase decisions are increasingly driven by the performance of the recognition engine, time to market, range and usability of voice applications. Thus, along with a fivefold expansion of the voice market over the last few years, there has 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 rely upon, enterprises and other end users often look to other third parties for application development and implementation.

Robertson Stephens, Inc. 19 Figure 7: EVOLUTION OF THE VOICE MARKET Phase I Phase II Phase III

Ma Call Center Replacements Call Center Replacements Call Center Replacements rk et CRM CRM Call Management Call Management mCommerce/vCommerce Ap D pl Embedded Applications Embedded Applications e ica ve ti Designed by VRU Designed by VRU lo on pm Vendors Vendors e nt Custom Applications Custom Applications Packaged Applications

D Equipment VARs & OEMs Equipment VARs & OEMs ist ri Direct Sales Direct Sales bu ti on Systems Integrators Systems Integrators Software OEMs

199 20 9 01 Source: Robertson Stephens.

Speech Recognition Vendors Respond with Unique Strategies Capitalizing on these trends, SpeechWorks has added direct marketing, services and an expanded product set—establishing itself as an end-to-end solutions provider. In addition to a staff of more than 100 integration professionals designing and deploying custom applications, SpeechWorks markets dialog modules (reusable bundles of code for pre-build grammars, vocabulary editing and user-interface designs) and toolsets to third-party integrators and end users to allow them to design and tune applications themselves while achieving a more desirable time to market. Lastly, the company offers end users a packaged software option with its SpeechSite applications for call routing and management and . Coupled with direct and indirect marketing efforts, 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 existing partnerships with VRU and other equipment vendors and VARs to exploit the rising demand for applications. Though projects have been limited with the Big 5 thus far—with Accenture, Cap Gemini and PriceWaterhouse Coopers each having had some involvement—we expect to see an increased role of these third parties in application design and deployment as these firms train more consultants and gain familiarity with voice solutions. To support their effort, Nuance introduced SpeechObjects in May 2000 (a step also taken by Philips) and a V-Builder toolkit—both steps aimed at improving the ability of third parties to design and deploy compelling voice-based solutions based on its technologies.

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

20 Robertson Stephens, Inc. 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 particularly focused on ensuring consistent quality throughout the user base. And, what is gained in early market reach and customer diversity may not deliver the same insight into customer requirements or longer- term ability to become a standard. Like the Windows (GUI) or the and Netscape (AOL) Internet browsers with which we are all so familiar, voice interfaces should see exponential gains in usage the more familiar we become with them. The more frequently we encounter the same interface commands and options, the more user friendly they become, the better their performance (because of speech’s unique self-learning feature), the more likely the interface 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 SpeechWorks Direct Sales Force (as of December 2000) 40 50 Percent Indirect Sales 2000 60% 37% (44% Q4:00) 2001E 60% 40–50% Original Equipment Manufacturer (OEM) Alcatel X Active Voice (Cisco) X Comverse X Hewlett-Packard X Intela X Intertel X Lucent X X MAXXAR X Mitel X Motorola X Nortel X X Value Added Reseller (VAR) Aspect X X AT&T X Avaya X X Edify X X IBM X X InterVoice-Brite X X Periphonics/Nortel X Syntellect X Systems Integrators Andersen Consulting X Cap Gemini X IBM X Omron X PriceWaterhouse Coopers X Redmond X Synchordia X Systex X Telera X Unisys X Note: Philips maintains strategic alliances with IBM, Andersen Consulting, PWC and Unisys.

Source: Company reports and Robertson Stephens estimates.

Robertson Stephens, Inc. 21 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). vXML provides 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 already familiar 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 community beyond today’s base and accelerate the proliferation of voice applications. vXML should also benefit Web portals and other Internet information providers by providing them a way to expand the reach of their content/services from the 250 million global PC-Internet users to the larger universe of telephony access devices—both wireless and wireline, 1.6 billion in 2000.

…Though Delivering on vXML’s Promise Is NOT Obstacle Free Though 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 user interface, which is server-based, and the deployment of a vXML interpreter by a voice portal or other host) or new applications must be developed in vXML. We believe steps to voice-enable content are just 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 tied to a VRU or speech-technology vendor, making it impossible for a user to go from one Web site to another if those sites are not part of the same interoperable group. Imagine using a traditional Internet browser that 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 by 1. vXML is a new standard (version 1.0 endorsed by W3C an order of magnitude. in May 2000) and subject to the normal shortcomings of first-generation technologies. 2. Raise the number of voice-capable Internet 2. The user is limited to accessing Web pages created access devices by three- to fourfold. with vXML—a small subset of the Web at present. 3. Speed the delivery of voice applications. 3. Competitive approaches to speech-enabling Web sites such as a voice browser, which permit users to browse 4. Separate voice applications and voice-enabled existing Web sites (faster and less expensive to data from telephony and speech-processing implement, but less user friendly due to the filtering resources. required to weed out graphics and embedded scripts from existing Web pages).

Source: IDC and Robertson Stephens.

22 Robertson Stephens, Inc. 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 tightly integrated proprietary solutions (bundling VRU equipment with voice applications and speech- recognition platforms) to an open, more vertically integrated model. By separating the voice application from the underlying speech-processing technology, vXML permits developers unversed in voice-enabling technology (like speech recognition and text-to-speech) to write applications for voice services. This should increase the voice development community from tens of thousands to millions of XML developers, in our view. However, applications supporting vXML will be required to work a vXML Interpreter and a voice interface so that telephony equipment can interpret and process verbal 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

Open, vXML Dominated Market Closed, VRU Dominated Market Systems Integration

Application Development Applications Environment Run-time Call Mgmt. vXML Browser Speech Touch vXML Interpretor Recognition Tone

Voice Modules Key:

VRU Speech Text-to- Speaker Touch Speech Technology Vendor Recognition Speech Verification Tone Third Parties

Source: Company reports, IDC and Robertson Stephens.

Robertson Stephens, Inc. 23 Our Forecast: Speech Technology Vendors Move Up the Value Chain as vXML Proliferates the Voice Market In addition to maintaining robust and differentiated speech recognition engines, we believe speech technology vendors, such as Nuance and SpeechWorks, will move up the value chain. Already offering robust user interfaces in combination with speech recognition, we expect these vendors to supplement these offerings with application development and deployment expertise.

Speech technology vendors such as Nuance and SpeechWorks have an advantage in the emerging market for vXML Interpreters and a defensible barrier to entry. To encourage loyalty and to protect their current position in the value chain, speech technology vendors are likely to extend their leadership with speech recognition engines to the emerging market for vXML Interpreters. At present, vXML Interpreters are available from Nuance, SpeechWorks and VoiceGenie—in varying degrees of compliance with the vXML 1.0 specifications. The vXML Interpreter acts as a middleware processor between the XML applications and telephony equipment. Because these will be open, not proprietary, they will support any speech recognition engine. However, we believe the current success of vendors like Nuance and SpeechWorks is a defensible barrier to entry. Deployments by blue-chip customers in a diversity of markets demanding 98%-plus performance, scale and flexibility—such as banking, brokerage, distribution, travel—should reinforce and strengthen their market share. Because of the self-learning feature of their speech recognition engines, which improves performance with each use, the accelerating momentum exhibited by these vendors should build a solid barrier to potential market entrants. We believe engine vendors such as Nuance and SpeechWorks will continue to improve the user experience with their engines by improving linguistic 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 acceptance of voice applications has always been a user-friendly, effective user interface. Regardless of who designs 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 and SpeechWorks. These vendors, already marketing Nuance Voyager and SpeechWorks’ VoiceXML Browser (via its Open Web Initiative), have a strong advantage in the interface market. First, they have 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 American Airlines, United Airlines, Federal Express, eTrade, Fidelity and hundreds of others. SpeechWorks, in particular, has a strong advantage in that every deployment of its technology uses the same interface—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. While Nuance’s interfaces vary to some degree from implementation to implmentation, it has some advantage because so many third parties are already familiar with implementing its user-interface technology into their applications. Thus, these players are the incumbents in the emerging voice Web. This is a far cry from the PC-Web, which allowed Microsoft to extend the look and feel of Windows (text and graphics) to the Web (text and graphics).

SpeechWorks has already moved up the entire value chain… SpeechWorks currently offers the full end-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 among its solutions—often an advantage in time to market or performance. As detailed above, SpeechWorks also achieves consistency among these deployments and reinforces its user interface as a standard. SpeechWorks also gains customer control. With this approach, SpeechWorks’ brand is never invisible to the application vendor or end user. The downside to this approach is that SpeechWorks may be considered a competitive application developer by third-party application developers seeking to buy voice technology, such as a speech recognition engine. Thus far, the company has ably managed these tradeoffs achieving approximately 200 customer deployments by

24 Robertson Stephens, Inc. more than 55 partners, including application vendors, equipment manufacturers, VARs and systems integrators. Refer to Figure 8.

…while Nuance is focused on balancing the search for value against goals to establish its technology 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 the broad global reach of third parties. As evidenced in Figure 8, Nuance has signed with most major equipment 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 has been less consistency across these applications. To improve the quality and consistency of these deployments, Nuance has bolstered its development programs. In an effort to “standardize” its user interface, the company has introduced Voyager, a voice browser third-party developers can re-use across geographies, applications and end markets. Another downside to Nuance’s strategy is a lack of customer control as its dependence on third-party developers and implementers may render its technology “invisible” to the enterprises or carriers deploying them. We expect the company to address this with an increased presence of its direct sales force (currently measured at more than 50) at major accounts.

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

Robertson Stephens, Inc. 25 SECTION III. VOICE TECHNOLOGY

Robertson Stephens, Inc. 27 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 more recent technologies stems from a shift to telephony-centric solutions, which reach a far wider market—1.6 billion telephony devices (wireless and wireline) relative to the 470 million PC’s worldwide—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 growth include 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 ) 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

Browser Application Application Components Voice XML Interpreter

Speech Voice Tools Text-to-Speech Recognition Authentication Development Development

Source: Robertson Stephens.

• Speech Recognition—This is the fundamental element of voice-enabling technology and enables a caller and a computerized system to interact. This two-way exchange compares to interactive voice response (IVR), where the system speaks to the caller (i.e., a recorded message 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 and understand human speech. The statistical models are based on advanced linguistic rules and recorded speech databases that gauge the probability that a phoneme—or small segment of speech—is part of a or spoken phrase. Speaker independent recognition relies upon a vast database of sampled information and phrases depending on word models created by individuals or phonetically developed models using . In some advanced systems, the models can program 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 then sending those waves through a signal processor to cancel background noise. Once that is completed, the digital waves are divided into segments (words, phonemes, time sequences, etc.)

Robertson Stephens, Inc. 29 and then analyzed by the various models to determine the correct word. Figure 12 outlines the steps necessary for speech recognition.

Figure 12: SPEECH RECOGNITION: A STEP BY STEP GUIDE Step 1 Capture and The VRU detects incoming speech, then Echo Cancellation Digitization removes noise (or outgoing speech) from the caller’s speech. This enables the system to identify the speaker’s entire message, including interruptions or barge-in, within 100 milliseconds. Step 2 Spectral This process facilitates the identification of speech by converting Representation the message into sound waves (128 frequency bands), mapped into a nonlinear spectral scale. Multiple techniques may be used to reduce variability caused by noise. Step 3 Segmentation Speech recognition systems take different approaches to segmentation. Frame-based or segment approaches, like those employed by Nuance, take uniform segments of sound in 10 milliseconds of duration, on average. SpeechWorks instead uses phonetic segments of 10–100 milliseconds long. The benefits of phonetic segmentation are lower computing power and fewer additional searches (see below), while the benefit of frame segmentation may be a more rapid response. Step 4 Modeling and The more a recognition solution is used, the larger its database of Classification models to which statistical models may be applied. Typically, an administrator or application vendor will set parameters to aid the matching process. Alternatively, dynamic vocabulary systems do not assume the users’ context. Featuring a self-learning feedback loop, modeling accuracy improves with the frequency of use. Step 5 Search and Match The final phase of speech recognition involves matching the segments 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 language understanding. Natural language understanding enables speech recognition technology to go beyond basic word recognition and actually recognize the meanings of phrases. For example, natural language understanding technologies take into consideration the many different variations of words or answers (a system waiting for a “yes” answer should recognize “yeah” as acceptable). 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 to include vernacular or common phrases; for instance, a brokerage could apply rules so that if a user requests 300 shares of “MOT,” it knows to buy Motorola. Lastly, natural language understanding permits more intelligent interaction with the user. For instance, a system may ask a person who mumbles if they asked for Boston or Austin when booking a plane ticket, while retaining information regarding credit card, departure time and place, rather than forcing the caller to start the travel application all over again. Most of the leading speech recognition vendors currently offer some degree of natural language understanding, but also look to this as a major area of development. • Text to Speech—Text-to-Speech (TTS), or speech synthesis, solutions translate data into voice messages. The solutions mean text messages, like e-mails, Web pages or faxes, may be read to the user over the phone. Or, if a cell phone user calls for driving directions from the car, they can

30 Robertson Stephens, Inc. be read to the driver. TTS is one of the older voice technologies and has been dominated by Lernout & 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 language and large vocabulary recognition) and obtain co-marketing support. In exchange, the company issued AT&T more than one million shares. Since then, the company has signed deals with Yahoo!, AOL and others for its new “Speechify” branded solution. Nuance recently announced availibility of its own TTS software, “Vocalizer,” and the creation of a U.K.-based TTS lab. Given Lernout & Hauspie’s bankruptcy filing, we would expect its TTS assets to be auctioned to an interested speech-recognition vendor. • Voice Authentication—Voice authentication is expected to become a vital element of voice commerce (vCommerce) and, when used in conjunction with a wireless data solution, a key facilitator of mobile commerce (mCommerce). Speaking, a user can create a “voiceprint” that encapsulates the unique characteristics of his/her voice. These prints may be used for future statistical comparisons to be compared to a live voice for verification, in conjunction with spoken account numbers or PINs. One of the challenges of voice authentication technologies will be to accurately read voiceprints in different levels of background noise and acoustic settings. Nuance launched its Verifier in June 2000 with several customer announcements. SpeechWorks OEMs third-party verification solutions from T-Netix and others

Figure 13: THE CONVERGENCE OF VOICE AND DATA

Caller

Global Switched Telephone Network Voice Response Unit (IVR)

IT Asset Business Web Data Data Data

Source: Robertson Stephens estimates.

Robertson Stephens, Inc. 31 SECTION IV. VOICE VENDORS

Robertson Stephens, Inc. 33 Nuance and SpeechWorks Enjoy Accelerating Growth and Significant Barriers to Entry

Players in the voice infrastructure market (also referred to as voice-enabling technology in this report) 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 the aforementioned 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 voice infrastructure, where barriers to entry are high. Advanced telephony-oriented speech-recognition engines include a self-learning feature that ensures these vendors realize exponential returns to their growth. For example, SpeechWorks’ aptly named SmartRecognizer gets “smarter” the more it is 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 new market 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 advent of standards such as vXML will encourage these vendors to continue their diversification from these foundation technologies toward value-added applications and services. SpeechWorks, and to a lesser degree Philips, has already taken strides in this direction.

Figure 14: RELATIVE POSITIONING OF LEADING SPEECH TECHNOLOGY VENDORS

SpeechWorks Nuance Philips Accuracy High High Mid-High Vocabulary/Grammar High High Highest Call Completion High High High Languages Supported 18 12 NA Core Recognition Text-to-Speech High Low NA Speaker Verification Low High NA

Customers* 170-plus 260 300-plus Enterprise References United Airlines American Airlines Swedish Rail eTrade Fidelity Carrier References MCI WorldCom Sprint PCS AT&T Wireless Internet References AOL Lycos NA

Business Focus Voice Technology Voice Technology Voice Technology Voice Applications Limited Applications

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

Source: Company reports and Robertson Stephens estimates.

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

Robertson Stephens, Inc. 35 Public Company Profiles

Robertson Stephens, Inc. 37 January 31, 2001 Nuance Communications, Inc. NUAN $41.88 Marianne Wolk 212.407.0427 Rating: Buy Candace K. Bryan 212.610.6109

Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 E Rating: No Buy EPS: EPS 2001E: Yes $(0.24) 1Q $(0.26) $(0.11) $0.01 EPS 2002E: No $0.16 2Q $(0.16) $(0.08) $0.02 Rev 2001E: Yes $87.2 3Q $(0.12) $(0.05) $0.05 Rev 2002E: Yes $130.9 4Q $(0.08) $0.00 $0.08 Year $(0.59) $(0.24) $0.16 52-Week Range: $182–24 P/E — NM 261.8x Fully Diluted Shares Outstanding (MM): 31.5 Market Cap (MM): $1,319.2 Average Daily Volume (000): 1,483 Book Value/Share 12/00 $8.01 3-Year Secular Growth Rate: 100.00% Dividend/Yield: None/None Revenues (MM): 2000 2001 E 2002 E Price/Book Value 12/00: 5.2x 1Q $7.9 $17.8 $28.2 Total Debt/Tot Cap 12/00: NM 2Q $12.0 $19.8 $31.0 Net Cash 12/00 (MM): $227.8 3Q $14.5 $23.2 $33.9 Net Cash/Share 12/00: $7.24 4Q $17.4 $26.4 $37.8 ROE 12/00: (4.2)% Year $51.8 $87.2 $130.9 EBITDA/Share 2001E: $(0.60) Eqty Mkt/Rev — 15.1x 10.1x

• Nuance Reported Another Strong Quarter with EPS of $(0.08) Nicely Surpassing Our Forecast by $0.03. Revenues rose 20% sequentially to $17.4 million, ahead of our $16.4 million forecast, sustaining Q3’s strong momentum. Services, a leading indicator of new business momentum (interface design precedes software licenses), gained one point to 29% of the quarter’s mix. Gross margins fell two points to 77% due to this shift in mix and a ramp in international 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 new hires and an $840,000 increase in bad debt reserves (prudence, not exposure). Excluding this one-time expense, EBITA would have been closer to $(5.4) million—ahead of our $(5.5) million forecast—and EPS would have been $0.02 higher. Deferred revenues rose $3.7 million to $10.7 million. DSOs rose 21 days to 99 days (above the 75–85 day target), due in part to and expanding international customer base (move from 21% of 1999 sales to 49% of Q4 mix added 5 days) 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 its business from telecoms, enterprises and Internet vendors appears strong. Nuance signed 60 new contracts in the quarter (30–40% of revenues), boosted by strong sales from existing customers (60–70% of revenues). Nuance announced a major win at GM Onstar for in-vehicle hands-free access to Internet content (available to one million GM owners Q1), 15–20 customers from newer enterprise verticals (insurance, health care, energy) and a deal with Siebela. • New Products, New Distribution and New Application Developers Support Outlook for 70% Growth in 2001 and Breakeven Results by Q4—One Quarter Ahead of Prior Estimates. • With the Stock Up Significantly Since January 9, 2001, the Pending Release of 12 Million Shares 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

Robertson Stephens, Inc. 39 the close of the company’s internal blackout period, February 2. Thus, we believe Nuance’s rocketing valuation and small float could mean the stock is volatile over the next few weeks. In light of Nuance’s strong Q4 results, solid momentum and improving visibility, we continue to support 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 dynamic growth of the rapidly evolving voice industry. We believe any weakness in its shares related to the 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 and underpenetrated 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 product cycle 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 speech recognition offering to include a Voice Web Server (for vXML), Vocalizer (text-to-speech for reading text-based content such as e-mail, news and weather to telephony users) and voice instant messaging (via its Speechfront acquisition for $10 million). Voyager, its voice browser introduced in September, saw solid early deal momentum Q4 with a win at ZTel.

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

…And a Huge Number of Nuance Application Developers Should Sustain Revenue Momentum. Nuance indicated it had amassed a base of 6,000 individual developers by Q4, adding 700 each month. We believe this base is extremely important as open standards such as VoiceXML shift the critical driver of new purchase decisions away from Nuance’s VRU-equipment relationships and toward Nuance’s role in adding value to voice applications—driving new revenues, reducing costs and improving time to market.

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

40 Robertson Stephens, Inc. 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)

Source: Robertson Stephens estimates.

Q4 Results Find Fundamentals Remain Excellent

Figure 16: DIVERSITY PAYS OFF—STRONG CONTRACT WINS IN TELCO HELP DRIVE 2000 GROWTH Q4 Mix Q4 Customers Telecom 36% British Telecom, Deutsche Telekom, Qwest, Sprint PCS, Telstra, Cosmote Enterprise 53% American Airlines, British Airlines, Lloyds, Merrill Lynch, Motorola, Sharepeople, Sears, Xelion 15–20 in energy, health care, insurance Internet 11% Tellme, GM Total 100% 60-plus Total Wins

Source: Company reports.

• 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. The company also announced a major new deal with GM Onstar. As part of this agreement, Nuance granted 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 an extremely attractive market segment (voice-enabled wireless data), GM was not a 10% customer in the quarter. • Telecom. Telecom revenues were bolstered by major wins this quarter at Qwest, Sprint PCS and Cosmote, the largest wireless carrier in Greece. • Portal. Portal momentum appears to be building on several fronts. First, from consumer services such as Tellme; second, from 30 application hosting partners including Tellme, General Magic and others; and, third, from the emerging portal services of established players such Sprint PCS and GM. Longer term, we believe portal business models may expand to include per-subscriber usage 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 than 22 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 the Americas rose 74% yea over year to $27 million. We forecast a 60% increase from the Americas and 80% increase internationally in 2001.

Robertson Stephens, Inc. 41 Figure 17: NUANCE COMMUNICATIONS, INC.—REVENUE BY GEOGRAPHY ($ in millions) Q3:00 Q4:00 Q/Q Growth Americas $6.796 $8.881 31% International $7.664 $8.533 11% Total $14.460 $17.414 20%

Source: Company reports.

…but International Hiring Spree Comes to an End as Nuance Pauses to Enjoy a Return on Its 2H:00 Investment Nuance added many new consultants, primarily overseas, over the last few quarters. The company indicated it grew consultants 40% in Q4, following a sizable 70% increase in Q3. As a result, service margins decreased two points in the fourth quarter, a trend we expect to see reversed in 2001 as Nuance 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 the United States. With this staff on board, we believe the company has sufficient resources to support strong international growth in 2001, which we forecast at 50–52% of annual revenues.

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

42 Robertson Stephens, Inc. The Company Nuance is a leading provider of a suite of speech recognition technologies designed to voice enable applications for telcos, enterprises and Internet customers. The company uses broad partner channels including OEMs, VARs and Systems Integrators to distribute its core speech recognition, natural language understanding and voice authentication technologies. Nuance was founded in 1994 and is based in Menlo Park, California.

Investment Thesis We 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 voice portal customers. Nuance offers one of the broadest suites of products in the industry, comparable only 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 ample opportunity for tremendous growth for the current market leaders. Nuance’s technology focus and broad distribution strategy should serve it well as this relatively new market continues to blossom.

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

Robertson Stephens, Inc. 43 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 $136.7 Services 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 45.6 Revenues 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 87.2 130.9 182.3 Trailing Q4 23 30 40 52 62 69 78 87 98 109 120 131 Quarterly 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 0.0 Cost 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 31.9 Licenses 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 97.7 136.7 Services 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 13.7 Gross 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 73.3 Research 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 40.5 General 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 20.9 Operating 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 88.6 108.7 134.6 Opex 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 14.8 Other Income Pretax 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) 12.9 Earnings 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 $0.08 Quarterly Reported $(0.31) $(0.20) $(0.15) $(0.19) $(0.18) $(0.15) $(0.12) $(0.05) $(0.04) $(0.03) $0.00 $0.03 Trailing 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 $0.51 Trailing 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 36.3 Margin Analysis Revenue Mix License 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/Q License 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/Y License 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%

Source: Company reports and Robertson Stephens estimates. January 9, 2001 Nuance Communications, Inc. NUAN $29.50 Marianne Wolk 212.407.0427 Rating: Buy Candace K. Bryan 212.610.6109

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

52-Week Range: $182–24 FD Shares Outstanding (MM): 29.8 Market Cap (MM): $879.1 Average Daily Volume (000): NA Book Value/Share 9/00: $8.49 3-Year Secular Growth Rate: 100.00% Dividend/Yield: None/None Revenues (MM): 2000E 2001 E 2002 E Price/Book Value 9/00: 3.5x 1Q $7.9 $17.7 $27.0 Total Debt/Total Cap 9/00: 0.1% 2Q $12.0 $19.7 $29.6 Net Cash 9/00 (MM): $93.3 3Q $14.5 $22.0 $32.4 Net Cash/Share 9/00: $3.13 4Q $16.4 $25.2 $36.2 ROE 2001E: (5.5)% Year $50.8 $84.6 $125.1 ROIC 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 including infrastructure, applications and services is currently estimated at approximately $1 billion and forecasted 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. Demand for 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 relationship management (CRM) solutions to reduce costs, improve customer satisfaction and loyalty; − Voice Web Interfaces for Wireless Data navigation and use of special purpose voice portals to access information via wireline and wireless phones; − mCommerce and the increasing use of telephone to initiate transactions, check orders and 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 and Voice 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. Nuance does have a small services effort, which we believe could be expanded to widen market acceptance, 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 among speech infrastructure vendors. While the channel strategy can lead to lower visibility and lumpy

Robertson Stephens, Inc. 45 sales patterns, the increased distribution should provide balanced exposure across multiple industries and help shoulder downturns in any geography or market.

• Wide Reach Allows for Broad Customer Base. Nuance counts more than 260 customers in the 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% and Internet-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 new channels, in our view. We forecast strong license sales that should lead to breakeven results by the fourth quarter, with an accelerated timetable possible in a more favorable macroeconomic environment. Though we believe Nuance’s emphasis on an indirect sales channel provides the widest possible reach for its solutions, we believe this reliance lowers visibility and adds a risk factor for the quarterly results. Nuance has historically booked 60–70% of its business in the last month of the quarter, largely due to the late sales reports from resellers. With this pattern, we believe it could be difficult to accurately gauge the company’s performance until the last week or so of the quarter.

• Initiating Coverage of Nuance with a Buy Rating. We forecast Nuance will achieve average annual growth of at least 50% over the next three years. We expect decreasing losses in 2001 to result in a $(0.23) EPS versus our $(0.65) EPS estimate in 2000. Breakeven should occur in the first quarter of 2002, which should lead to full-year 2002 EPS of $0.16. At $29.50, the stock is trading at approximately 56x our 2003 EPS forecast of $0.53, 11x our 2001 and 8x our 2002 revenue projection. Our recommendation is only oriented toward longer-term investors interested in 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 a technology-centric business strategy, choosing to focus on core speech recognition, voice authentication, browser and Voice XML technologies. Though the company does have a small services effort, we believe the current strategy will be to provide customers access to the recently introduced application developers kit and toolkit, in addition to a broad range of professional services experts.

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

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

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

46 Robertson Stephens, Inc. international markets (international accounted for 50% of Q3:00 revenues). At year-end 1999, Nuance counted more than 150 customers for its software platform and we estimate that number could exceed 300 at year-end 2000.

− Voice Authentication and Voice Browser add additional value. Nuance offers its customers important value-add with its Verifier and Voyager products, which respectively enable voice authentication and voice browsing. Verifier works by creating user “voiceprints”, allows for rapid verification for site access, vCommerce or other key applications. Voyager is similar to the concept of a Web browser, but allows users to access voice-enabled Web content by simply speaking the site, name or information desired.

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

• Nuance’s Per-Port Pricing Should Fuel Solid Growth from Existing Customers. Nuance prices its voice infrastructure solutions on a per-port basis, with additional ports required as application richness develops. For instance, one port could support 200–300 subscribers for voice dialing alone, but the inclusion of a Voyager voice browser offering could reduce capacity to 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 320–370 ports (or $220,000) for an overall average deal size of $130,000. We believe repeat business currently accounts for 30–50% of quarterly revenues. • We Forecast 50% Average Annual Growth from Broad Customer Base Including Enterprise, Telecom and Internet Markets. Nuance counts more than 260 customers in the telco, 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-related companies 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 voice enabling in the telco market could lead to Nuance generating as much as 50% of its total revenue from this segment over the next 2–3 years. Already, Nuance has captured the top four wireline carriers and two of the top four wireless carriers in the United 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 with small screen and tedious key-in requirements. Coupled with the boom in wireless data services, we expect voice-enabling technologies to become a key part of wireless carriers’ strategy to raise subscriber revenues and improve customer retention.

Robertson Stephens, Inc. 47 Figure 19: NUANCE COMMUNICATIONS, INC.—TELCO CUSTOMER OVERVIEW Date Carrier Announced Partner Service Sprint 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.

Source: Company reports.

• Enterprises represent the largest consumers of Nuance speech-recognition technology. Enterprise revenues have traditionally been Nuance’s strongest customer base, with the segment accounting for 60% of total revenues for the first three quarters of 2000. We view enterprises as one of the major beneficiaries of voice technology, as it stands to not only improve customer service (automating call centers and customer relationship management solutions), but also dramatically reduces associated costs. Nuance’s 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, lower overhead costs and lower per-call costs. Our own analysis demonstrates 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

Date Enterprise Announced Partner Service

Charles Schwab 1996 NA Voice-recognition retail brokerage services and user voice authentication. American Airlines 1998 Periphonics/Nortel Speech-recognition engine for voice driven flight information and frequent flyer program access and upgrade requests. Home Shopping 6/29/99 Edify Speaker-verification system. Network UPS 1998 NA Nationwide, voice activate, automated package- tracking system. Ernst & Young 8/16/00 Lyrix Voice portal.

Source: Company reports.

• The Internet represents an emerging growth opportunity for Nuance. Internet and Internet-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’s solutions, Internet companies may offer end users access to Web content, e-mail and vCommerce from any wired or wireless phone. Though Nuance’s competitors have seen more initial success with some of the traditional Internet leaders, those early contracts (like those announced with Yahoo! by SpeechWorks) may still allow Nuance opportunities to sell speech solutions for additional applications. Nuance is only recognizing revenues from

48 Robertson Stephens, Inc. portals when the payment is received. In addition, approximately two-thirds of sales to portals is direct, allowing the company better visibility on the customers needs and ability to pay.

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

Internet Date Announced Partner Service Lycos 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.

Source: Company reports.

• Nuance Is Expanding Its Distribution Model to Include Multiple Distribution Channels. By positioning itself as a “partnering company,” we believe Nuance has one of the broadest potential reaches among speech infrastructure vendors. Approximately two-thirds of Nuance’s revenues are generated from indirect channels. Indirect sales volumes have been increasing as a percent of revenues over the past few years, starting at 31% in 1998, moving to 56% in 1999 and YTD 2000 hitting approximately 67%. Though we expect this percentage to stabilize near current levels, the company has been adding additional market reach via OEM agreements with software vendors and eCommerce companies as well as new relationships with systems integrators. 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 expect more 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 geographic areas and charged with both direct sales and maintaining relationships with sales in direct accounts. As a rule, direct sales are focused on voice portals and some enterprises (i.e., Fidelity).

Figure 22: NUANCE PARTNERS—INDIRECT SALES CHANNEL OEM Alcatel Mitel Comverse Motorola Intertel Nortel Lucent VAR Aspect InterVoice-Brite* Avaya Periphonics/Nortel Edify Syntellect IBM Systems Integrators Andersen Consulting PriceWaterhouse Coopers Cap Gemini Redmond IBM Synchordia Omron *New

Source: Company reports.

Robertson Stephens, Inc. 49 • A Leader in a Close Race, We Believe Nuance Benefits from High Barriers to Entry. We believe this market, projected by at least $5–10 billion by 2005 is large enough for healthy competition and should continue to provide ample opportunity for tremendous growth for the current market leaders—Nuance, SpeechWorks and Philips. As these leaders continue to dominate the market, we believe first-mover advantages and self-learning speech recognition engines (leading to better performance with usage) will create high barriers to entry that will be difficult for later entrants to overcome.

• The Difference Between Nuance and Its Nearest Competitor, SpeechWorks, Comes Down to Strategy. We believe the key differentiating factor between Nuance and SpeechWorks is the strategy with which they respectively offer their technology. As it stands at present, Nuance has a 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 its revenues 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 and others to provide wider distribution and a more complete end-to-end solution for its customers. In contrast to this model is SpeechWorks, which has chosen to approach the market with a more complete internal end-to-end offering, balancing its technology sales with a suite of applications and 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 accelerated growth. SpeechWorks is building strong third-party relationships with equipment, software and service vendors as it strives to grow internationally. At the same time, we believe Nuance is building its internal services to help accelerate market acceptance for innovative new voice applications.

• 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 margin expansion 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 these forecasts, we believe Nuance can improve its return on equity from (5)% Q3:00 to more than 10% 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 significantly from its high set last August. In addition, we believe the stock has been punished recently as a result of the end of a lockup in late December.

50 Robertson Stephens, Inc. Figure 23: NUANCE COMMUNICATIONS, INC.—VOICE SOLUTION STOCK PERFORMANCE

200 Index NUAN 180 SPWX

160

140

120

100

80 Stock Price ($)

60

40

20

0 2-Jan-2001 7-Nov-2000 1-Aug-2000 5-Dec-2000 10-Oct-2000 24-Oct-2000 21-Nov-2000 15-Aug-2000 29-Aug-2000 12-Sep-2000 26-Sep-2000 19-Dec-2000 Date

Index includes: BRKT, FONX, INTV, LWNTF, NMSS, NUAN, ONEV, SPWX, VOXW.

Source: FactSet.

At $29.50, Nuance’s stock is trading at approximately 56x our 2003 forecast and 11x our 2001 revenue and 8x our 2002 revenue projections. At current levels, we recommend the stock only for longer-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 believe Nuance’s leading voice technology, attractive software-based business model and solid customer base should position it to enjoy substantial upside to our projections as demand for call center replacement, customer relationship management, call management, wireless Web navigation and mCommerce 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/Rev Ticker 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 7x SpeechWorks SPWX $20.13 (81)% 29.8 600 $480 10x 6x 8x 5x

Average 11x 7x 9x 6x

Price to Revenues (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/ Share Nuance NUAN 50.8 84.6 125.1 67% 48% $(0.62) $(0.23) $0.16 NM 184x 3.13 9x 3x SpeechWorks 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.

Robertson Stephens, Inc. 51 Company Highlights

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

Products Nuance’s stack includes many of the most crucial elements of speech technology, including speech recognition and voice authentication technologies. More recent additions to the stack include a voice browser, a vXML server, a developer’s toolkit and customizable software components. Nuance’s primary focus was on its speech recognition server and authentication products, with special features including natural language expertise, extensive vocabularies, 12 different languages/dialects (with several more to be launched soon and biometric speaker verification and acoustic differential considerations for verification. The company has recently branched out into more service-oriented offerings, including the toolkit and development tools. We believe these types of offerings are in line with Nuance’s current strategy to focus on providing its customers with technology, leaving application development and customization to the customers or external system integrators that choose to license its tools.

Figure 25: THE NUANCE STACK

Br owser ” “Voyager ” Speech “ Obj ect s Appl ic at io n Voice XML Interpreter Components

“Voice Web Ser ver ” ”

SpEech Voice

Recognition Authentication Tools Buil der Devel opment

“Nuance 7” “Ver if ier ” “V-

Source: Company reports and Robertson Stephens.

52 Robertson Stephens, Inc. Figure 26: NUANCE COMMUNICATIONS, INC.—PRODUCT OVERVIEW

Product GA Date Functionality Nuance 7 June 2000 Software server that provides speech recognition and natural language understanding capabilities. Operates on standard CPU hardware architectures and operating systems (, Windows NT). Can work on single 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 comparable scalability and accuracy but with more entry-level applications that recognize limited phrases. Can be easily upgraded to Nuance 7. Nuance Verifier June 2000 Software server that provides voice authentication based on unique predetermined user voice qualities or “voiceprints.” Users create voiceprints by speaking certain phrases prior to use. Can be easily integrated with the Nuance 7 platform. Speech Objects May 2000 Software components containing various grammars and dialog frameworks 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 and includes SpeechObject software components. Can be integrated with C/C++ or Java telephony applications. Also allows developers to map existing HTML content to SpeechObject application components. Nuance Voyager Sept 2000 Voice browser providing a standard voice user interface for access to traditional telephony applications, voice portals and voice-enabled Internet content. Similar to the concept of a Web browser. Voice Web Server Sept 2000 VoiceXML interpreter, speech recognition and authentication.

Source: Company reports.

Competition Competitors 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 made investments in voice interface technology.

Robertson Stephens, Inc. 53 The Company Nuance is a leading provider of a suite of speech recognition technologies designed to voice enable applications for telcos, enterprises and Internet customers. The company uses broad partner channels including OEMs, VARs and Systems Integrators to distribute its core speech recognition, natural language understanding and voice authentication technologies. Nuance was founded in 1994 and is based in Menlo Park, California.

Investment Thesis We 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 voice portal customers. Nuance offers one of the broadest suites of products in the industry, comparable only 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 ample opportunity for tremendous growth for the current market leaders. Nuance’s technology focus and broad distribution strategy should serve it well as this relatively new market continues to blossom.

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

54 Robertson Stephens, Inc. 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 2004E Licenses $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 $181.0 Services 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 53.5 Revenues 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 84.6 125.1 174.3 234.5 Trailing Q4 15 16 17 20 23 30 40 51 61 68 76 85 94 104 114 125 Quarterly 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 0.7 Cost 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 36.5 Licenses 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 95.4 133.5 104.9 Services (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 9.4 Gross 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 89.1 Research 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 46.9 General 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 23.4 Operating 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 88.0 105.2 128.7 159.4 Opex 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 38.5 EBITA 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 24.8 Other Income Pretax 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) 0.31.53.04.6(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) 0.20.91.82.8(18.2) (17.6) (7.5) 5.6 19.0 38.0 Non-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 Items Reported 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 37.5 Earnings 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 $0.08 Quarterly 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 $0.07 Trailing 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 $0.96 Trailing 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 39.7 Margin Analysis Revenue Mix License 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/Q License 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/Y License 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%

Source: Company reports and Robertson Stephens estimates. Figure 28: NUANCE COMMUNICATIONS, INC.—QUARTERLY BALANCE SHEET ($ in millions)

2000E 2001E 2002E FY 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 $2.893 Trade Receivables 6.270 9.810 12.555 14.417 15.576 17.368 19.367 22.178 23.730 26.018 28.528 31.818 Prepaid 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 10.847 Total 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 8.678 Accrued Liabilities 6.168 10.915 12.554 14.417 15.576 17.368 19.367 22.178 23.730 26.018 28.528 31.818 Deferred Revenue 3.353 6.724 7.073 7.208 7.788 8.684 9.683 11.089 11.865 13.009 14.264 15.909 Total 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 18.802 Other 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 22.266 Excess Cash 35.726 99.814 92.413 231.893 227.880 224.315 221.986 219.357 218.346 219.043 219.554 220.922 Total 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 0.278 Long-Term Debt 1.167 Total 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 Analysis Cash $36.36 $100.77 $93.57 $233.20 $229.30 $225.89 $223.75 $221.37 $220.50 $221.41 $222.15 $223.82 Cash/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.

Source: Company reports and Robertson Stephens estimates. Figure 29: NUANCE COMMUNICATIONS, INC.—RETURN ON INVESTMENT CAPITAL ($ in millions)

2000E 2001E 2002E FY 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 38.4 113.6 253.4 249.0 245.6 242.9 240.7 239.1 238.8 239.3 240.7 243.2 Excess 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 22.3 Incremental 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%

Source: Company reports and Robertson Stephens estimates. Figure 30: NUANCE COMMUNICATIONS, INC.—CASH FLOW STATEMENT ($ in millions)

2000E  2001E  2002E FY December Q1A Q2A Q3A Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating Sources Earnings $(7.2) $(5.7) $(4.6) $(4.4) $(3.4) $(2.7) $(2.3) $(1.5) $(0.3) $0.5 $1.4 $2.5 Depreciation Deferred 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 Requirements Net 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 Outlays Software Development Other 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 1.4 Less: Dividends Net 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 Capital Short-Term Debt (0.1)(0.6)0.0000000000 Long-Term Debt (0.2)(1.2)0000000000 Equity 6.682.6144.4000000000 Total Sources 6.380.8144.4000000000

Cash Flow Summary Quarter 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 Financing6.380.8144.4000000000 - Funds Used by Dividends 000000000000

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 1.7 Increase 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 $0.05 Funds 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

Source: Company reports and Robertson Stephens estimates. January 9, 2001 SpeechWorks International Inc. SPWX $20.13 Marianne Wolk 212.407.0427 Rating: Buy Candace K. Bryan 212.610.6109

Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 E Rating: 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 NM Fully Diluted Shares Outstanding (MM): 27.7 Market Cap (MM): $557.6 Average Daily Volume (000): NA Book Value/Share 12/99: $4.97 Revenues (MM): 2000 2001 E 2002 E 3-Year Secular Growth Rate: 100.00% 1Q $5.1 $11.1 $20.4 Dividend/Yield: None/None 2Q $6.0 $13.4 $23.6 Price/Book Value 12/99: 4.1x 3Q $8.6 $15.6 $26.6 Net Cash 12/99 (MM): $118.6 4Q $9.6 $18.1 $30.9 Net Cash/Share 12/99: $4.29 Year $29.3 $58.2 $101.5 ROIC 2000E: (138.3)%Eqty Mkt/Rev — 9.6x 5.5x

• Voice Interface Solutions Provide a Human Touch to Data Applications. Voice infrastructure solutions automate speech, the natural human interface to obtain customer service, place an order or gain access to Web content. These solutions translate speech into text and data (and text 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 by 2005. The market for voice solutions including infrastructure, applications and services is estimated at approximately $1 billion and forecast to reach $5–10 billion worldwide by 2005. We expect SpeechWorks and competitors Nuance (NUAN $29.50) and Philips to capture the lion’s share of this opportunity. We believe demand for SpeechWorks and the voice solutions market 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 solutions; − CRM—Rising demand for voice automated call center and customer relationship management (CRM) solutions to reduce costs, improve customer satisfaction and loyalty; − Voice Web Interfaces for Wireless Data navigation and use of special purpose voice portals to access information via wireline and wireless phones; and − mCommerce and the increasing use of telephone to initiate transactions, check orders and inventories and other eBusiness services. • Approximately 200 Deployments by Blue-Chip Customers Attest to the Strong Performance of SpeechWorks’ Solutions. SpeechWorks’ systems feature 90%-plus accuracy and even higher transaction completion rates of 97–98%. We credit these and ongoing performance gains with key wins at carriers, enterprises and Internet providers including AOL, Federal Express, MCI WorldCom, United Airlines and Yahoo!.

Robertson Stephens, Inc. 59 • SpeechWorks, along with its major competitors, Nuance and Philips, dominates the fragmented market for speech recognition solutions where barriers to entry are high. Advanced telephony-oriented speech-recognition engines include a self-learning feature that ensures these vendors realize exponential returns to their growth. SpeechWorks’ aptly named SmartRecognizer gets “smarter” the more it is used, because the statistics in its speech recognition engine have more examples to draw from. Thus, the performance gap between SpeechWorks 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 its expertise in core speech recognition to a suite of software infrastructure, applications and professional services. This rich product mix provides SpeechWorks with approximately 70% average visibility entering each quarter (though current backlog is somewhat higher). 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 shift toward higher-margin software. We forecast software grows from 52% of its mix in 2000 to 65% by 2003. This favorable mix shift, coupled with ongoing scale economies, should mean considerable margin expansion during the next several years and produce breakeven results by Q4:02, if not sooner.

• Initiating Coverage of SpeechWorks with a Buy Rating. We forecast SpeechWorks will achieve average annual growth of at least 75% over the next three years. Given our growth and margin expansion expectations, we expect it to reduce its losses throughout 2001 and 2002 and report at least $0.10 in 2003 and $0.50 in 2004. At $20.13, the stock is trading at approximately 40x our 2004 forecast and 10x 2001 revenue projections. Near term, we believe the stock could continue to come under pressure as it absorbs the end of a lockup January 29. Though approximately 18 million shares are affected, we believe the stock is held largely held by officers subject to volume restrictions (5 million+/-) and VCs (11 million) suggesting to us that perhaps 1–3 million shares could actually reach the market. In light of these issues and current valuations, our recommendation is only oriented toward longer-term investors interested in a pure play on the spectacular 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 Nuance and 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 voice interfaces and applications.

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

1. Moving from a single product, core speech recognition, to a diversified offering. Although we 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 growth over the next few years.

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

60 Robertson Stephens, Inc. SpeechWorks agreed to acquire Eloquent for $17 million in stock and cash to expand the 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 other offerings on an as-needed basis. Transparent to the customer, this software provides additional security to speech applications by automatically verifying the identity of the user by their voice. A small market at present, we expect greater use of speaker verification to come as voice is increasingly used in mCommerce and eBusiness applications. • Introducing turnkey applications to expand market acceptance of speech technology to a new group of customers. In addition to providing a core speech infrastructure technology (such as its SpeechWorks 6.5 recognition engine, toolset and dialog modules), SpeechWorks offers prepackaged applications to companies lacking available resources internally to develop or design custom applications. The complete turnkey solution (bundling software, hardware and services) is also popular with larger organizations seeking to leverage SpeechWorks’ design and implementation experience. The first of these applications is SpeechSite, a customer service application, should be followed by additional introductions of packaged applications in 2001. 2. Extending market leadership via advanced user-interface technology. We believe SpeechWorks is relying upon a combination of internal and third-party development (via partnership and acquisition) to continue to improve the performance of its recognition engine. A major focus is the user interface, which is expected to become “more human” by incorporating greater advances in natural language, conversational vocabulary and barge-in capabilities than what is currently available from SpeechWorks and other market leaders. Increased performance should continue to expand customer acceptance of speech applications and raise the bar for competitors. By “humanizing” the voice interface, SpeechWorks hopes to gain the ease of use and user friendliness necessary for its solutions to reach the massive 2.5 billion wireline and wireless access devices forecast by 2003 with its systems.

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

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

Robertson Stephens, Inc. 61 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 to 14% of Q3 revenues. The company targets 20% of its mix from international customers over the next year or two. It now has more than 45 non-U.S.-based clients and partners in Europe, Latin America and Asia, and as of Q3 supported more than 15 languages. With support for three additional languages due shortly—Japanese, Korean, Cantonese—we believe the company will have amassed the technology required to reach the critical mass of wireline and wireless telephony users globally.

5. Expanding market reach through global distribution.

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

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

Percent of Mix CAGR Channel 1999 2000 2001E 1999–2001E Direct 86% 67% 59% 68% Indirect 14% 33% 41% 250% Total 100% 100% 100% 104%

Source: Company reports and Robertson Stephens estimates.

• Raising direct sales effort on a global basis. As of Q3, SpeechWorks had 34 direct sales representatives. We expect the company to grow this force to at least 40 as of Q4:00 and 60 strong by year-end 2001. Often, the company’s direct sales effort is accompanied by marketing from outsourcers or ASPs, VRU vendors, software platform vendors, professional services organizations and carriers. Its direct sales approach, coupled with direct implementation experience, has enabled SpeechWorks to market strong performance across a heterogeneous base of equipment, applications and industries—a key to winning deals with AOL and others. 6. Leveraging value-added services to ensure a consistent high-performance offering regardless of application, industry or geography. SpeechWorks’ unique end-to-end offering features software infrastructure, applications and a professional services group focused on application 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

62 Robertson Stephens, Inc. asset in the company’s pursuit of new business, enabling the company to promise potential customers reduced technology risk and superior time to market. SpeechWorks’ services team also ensures its user interface is common across all SpeechWorks applications—regardless of whether they are custom developed or designed by SpeechWorks. Because its voice interface is the same, regardless of application, geography or industry, SpeechWorks-enabled applications should be dramatically more usable as users gain familiarity with the systems each time they encounter them. In contrast, competitive speech applications find their interface varies depending on who designed or implemented the application.

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

The difference between Nuance and its nearest competitor, SpeechWorks, comes down to strategy. We believe the key differentiating factor between Nuance and SpeechWorks is the strategy with which they respectively offer their technology. As it stands presently, Nuance has a 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 its revenues 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 and others to provide wider distribution and a more complete end-to-end solution for its customers. In contrast to this model is SpeechWorks, which has chosen to approach the market with a more complete internal end-to-end offering, balancing its technology sales with a suite of applications and 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 accelerated growth. SpeechWorks is building strong third-party relationships with equipment, software and service vendors as it strives to grow internationally. At the same time, we believe Nuance is building its internal services to help accelerate market acceptance for innovative new voice applications.

Attractive business model should mean SpeechWorks experiences high returns on its growth. SpeechWorks is uniquely positioned with a soup-to-nuts customer offering, extending its expertise in core speech recognition to a suite of software infrastructure, applications and professional services. This rich product mix provides SpeechWorks with approximately 70% visibility entering each quarter, though we estimate the current backlog may measure as much as two quarters. 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 shift toward higher-margin software. We forecast software grows from 52% of its mix in 2000 to 65% by 2003 generating average annual growth of 75%. This favorable mix shift, coupled with ongoing scale economies, should mean considerable margin expansion during the next several years and produce breakeven results by Q4:02, if not sooner. We forecast EPS of $(0.66) in 2001, $(0.28) in 2002 and at least $0.10 by 2003 and $0.50 by 2004. Given these forecasts, we believe SpeechWorks can improve its return on equity from (16)% Q3:00 to 13% by the fourth quarter of 2003 (5% for the full year). Return on invested capital of (138)% for Q3:00 should improve to approximately 34% by Q4:03 (8% for the full year).

Robertson Stephens, Inc. 63 Valuation

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

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

200 Index NUAN 180 SPWX

160

140

120

100

80 Stock Price ($)

60

40

20

0 2-Jan-2001 7-Nov-2000 1-Aug-2000 5-Dec-2000 10-Oct-2000 24-Oct-2000 21-Nov-2000 15-Aug-2000 29-Aug-2000 12-Sep-2000 26-Sep-2000 19-Dec-2000 Date

Index includes: BRKT, FONX, INTV, LWNTF, NMSS, NUAN, ONEV, SPWX, VOXW.

Source: FactSet.

At $20, SpeechWorks’ stock is trading at approximately 40x our 2004 forecast and 10x next year’s revenue projections. At current levels, with a lockup ending January 29 (1–3 million of 19 million shares should be traded), we recommend the stock only for longer-term investors interested in the spectacular opportunity presented by the voice market—approximately $5–10 billion. We believe SpeechWorks is well positioned to join a handful of competitors, including Nuance and Philips, to dominate 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 enjoy substantial upside to our projections as demand for call center replacement, customer relationship management, call management, wireless Web navigation and mCommerce services accelerate.

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

% ∆ From Market Enterprise Mkt Val/Rev Ent Mkt Val/Rev Ticker 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 7x SpeechWorks SPWX $20.13 (81)% 29.8 600 $480 10x 6x 8x 5x

Average 11x 7x 9x 6x

Price to Revenues (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/ Share Nuance NUAN 50.8 84.6 125.1 67% 48% $(0.62) $(0.23) $0.16 NM 184x 3.13 9x 3x SpeechWorks 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 a result, we anticipate a strong sequential pickup in direct sales from $4.6 million in September to $6.5 million. Channel revenues should decline sequentially due to tough comparisons with a large contract recognized in the third quarter from InterVoice-Brite. In total, we forecast at least $9.6 million up 11% from $8.6 million for third-quarter revenues. Gross margins are expected to decline from 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 improve by 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 technologies designed to voice enable applications for telcos, enterprises and Internet customers. The company uses a combination of direct and third-party distribution to market an end-to-end solution of voice infrastructure (speech recognition, natural language understanding and text-to-speech technologies), applications and professional services. The company was founded in 1994 by a group from Massachusetts Institute of Technology’s (MIT) Spoken Language Systems Group and is based in Boston, Massachusetts.

Products SpeechWorks 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 to build 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 new languages pending) and rapid time to market. Typical applications deployed with SpeechWorks 6.5 include: travel (airline and agency), banking and brokerage, health care, messaging and eCommerce. 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 supports custom vocabularies, benefiting from a self-learning feedback loop. The platform also supports voice recognition during continues speech and barge-in scenarios.

Robertson Stephens, Inc. 65 • DialogModules. A SpeechWorks innovation, DialogModules are pre-packaged software building blocks to hasten the development and deployment of speech applications. DialogModules integrate and personalize SpeechWorks capabilities quickly into applications. The modules were initially designed to handle rudimentary tasks such as a capturing a date or a yes/no response and now include: Address DialogModule, Verification DialogModule and natural language enhancements. As of Q3, SpeechWorks had 17 DialogModules available to handle Address DailogModule lower level takes in application development. Mid-September, the company unveiled SpeechSecure, a new module to provide security to callers that access personal information and conduct commerce via the phone. Offered with the SpeechWorks 6 platform, the DialogModule is also available for simple integration into third-party speaker verification solutions. • SpeechWorks Tuning Tools. Operating and tuning tools are available to clients to evaluate and improve the performance of deployed applications based on actual caller experiences. These graphical reporting and analysis tools enable users to achieve 90%- plus performance. SpeechWorks provides application developers a detailed view of how the application is being used and how it is performing for end users. For example, after reviewing the usage data the organization can tune the system to recognize “yeah” as “yes.” Data analysis tools permit rapid identification and resolution of problems, while reports enable firms to track and monitor the efficiency of the user interface. • Automatic Adaption Tools. SpeechWorks uniquely integrates its adaption tools right into its core speech recognition engine. These tools automatically adapt the speech recognition engine to the acoustic, pronunciation and language models encountered as the application is used more frequently. 2. Complementary Technologies. Increasingly, these emerging technologies are bundled with speech-recognition solutions in applications but do not generally influence speech-engine purchases.

• 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 a structured environment. For example, it will confirm a data field or read you the weather. On December 21, SpeechWorks agreed to acquire Eloquent Technology for $5.25 million in cash and 300,000 shares—approximately $17 million. The acquisition adds 12 languages to SpeechWorks’ text-to-speech offering. • Speaker Verification. Speaker verification solutions identify a user based on the caller’s voice. These solutions increase the security of voice applications above and beyond spoken account numbers or PINs. Available since September, SpeechWorks OEMs verification from third parties such as T-NETIX and bundles these solutions with its SpeechWorks 6 platform on demand. • In addition, SpeechWorks has leveraged its strength in enabling infrastructure to several applications.

66 Robertson Stephens, Inc. • SpeechSite Applications. Based on the SpeechWorks 6 platform, SpeechSite is a turnkey customer service application based on SpeechWorks’ DialogModules including the software, equipment and services needed to deploy an automated speech solution in under two weeks. Typical SpeechSite deployments perform: − Call routing and management, answering and directing telephone calls based on vocal 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 XML browser (an emerging standard) allows users to connect a variety of speech enabled Web sites so that users can easily navigate among them. Services In addition to marketing its packaged software solutions, development tools and applications, SpeechWorks has an internal professional services organization (85 professionals) performing application 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 most major VRU vendors, recent emphasis is on customizing client applications to meet more exact specification and faster implementations.

Markets The communications market promises the fastest growth. Approximately 25% of revenues, we believe 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 contracts with AT&T, MCI WorldCom and Bell South. SpeechWorks’ solutions allow carriers to offer several benefits to end users, including voice activated dialing, spoken access to e-mail and, perhaps most notably, they allow carriers to create voice portals for easier browsing on wireless devices with small screen and tedious key-in requirements. Coupled with the boom in wireless data services, we expect voice-enabling technologies to become a key part of wireless carriers’ strategy to raise subscriber revenues and improve customer retention.

Enterprises represent the largest consumers of speech-recognition technology. Enterprise revenues have traditionally been SpeechWorks’ strongest customer base, with the segment accounting for approximately two-thirds of total revenues. We view enterprises as one of the major beneficiaries of voice technology, as it stands to not only improve customer service (automating call centers and customer relationship management solutions), but also dramatically reduces associated costs. 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

Robertson Stephens, Inc. 67 only $0.10 to $0.85. This cost reduction is achieved through more efficient handling of calls, lower overhead costs and lower per call costs. Our own analysis demonstrates an average per call savings of $0.86 over a four-year period, with an agent-assisting call averaging $0.95 and a speech-enabled call averaging only $0.09.

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

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

68 Robertson Stephens, Inc. Figure 34: SPEECHWORKS INTERNATIONAL INC.—CUSTOMER OVERVIEW

Communication Web Content/ Service Providers Applications Enterprise >25% Revenues <15% Revenues 60%+/- Revenues Wireline: Voice Portals (Wireless/Wireline Technology/Manufacturing: • BellSouth Access): • Apple Computer • MCI WorldCom • AOL • Aspect Communications • AudioPoint, Inc. • CTL, Inc. • HeyAnita.com • Dialogic/Intel • Quack.com/AOL • Hewlett-Packard • Yahoo! • InterVoice-Brite • MAXXAR Corp. • Nortel Networks • Palm • Universal Electronics Wireless: Wireless Data Applications: Banking/Brokerage: • Bell South • Everypath • Bank United • CellularOne • MapQuest.com • Bidwell & Company • SingTel Mobile • XYPOINT/Tsys • 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: Wireline Data Applications: Travel: • AOL • Anyday.com • AirTran Airways • E-Plus • eJiva • Amtrak • NEXTLINK Interactive • foodline.com • Continental Airlines • Hey Software • United Airlines • NetByTel.com • Price Interactive • Synapse.com Other: Other: Other: • Energis • Federal Express • Guardian Life Insurance • McKesson HBOC • Stop & Shop, AHOLD/USA

Source: Company reports.

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

Robertson Stephens, Inc. 69 to-speech offering based on the AT&T technology, was generally available as of early December and we expect revenues to ramp through 2001.

AOL. SpeechWorks signed a three-year non-exclusive agreement with AOL whereby SpeechWorks will license its SpeechWorks 6 recognition software to AOL to voice-enable its online services. In addition to license fees (which should begin in the fourth quarter), SpeechWorks will support the deployment of these solutions and receive service and maintenance fees. There is also a revenue sharing component to the AOL agreement, which is triggered if AOL, or its partners, achieve preset usage levels (or minimum user-based fees) with their voice portal. AOL will also grant two-year licenses 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 this agreement, SpeechWorks issued AOL 401,284 shares of stock at $12.46 in a private placement concurrent with its IPO. The company also received warrants for 765,422 shares exercisable if AOL reaches minimum voice portal user milestones .

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

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

Competition We outline SpeechWorks’ positioning vis-à-vis its primary competition, Nuance Communications and Philips 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 a computer interface (when combined with keyboard and mouse), rather than as a telephony interface which is SpeechWorks’ focus. Microsoft has a Speech.Net Group as of 1993 and recently increased its focus via its recent acquisition of Entropic.

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

Investment Thesis SpeechWorks offers an end-to-end suite of voice solutions featuring infrastructure, applications and professional 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 service providers, enterprises and Internet customers. Blue-chip customers attesting the performance of SpeechWorks’ solutions include: MCI WorldCom, AOL, Yahoo!, Palm and Citigroup. We believe the speech-recognition software market, projected by Datamonitor to reach more than $1.2 billion by 2004, represents an even greater opportunity for SpeechWorks, $5–10 billion by 2005, when combined with voice applications and professional services. We believe SpeechWorks, along with competitors Nuance and Philips are likely to capture at least 70–85% market share longer term due to substantial barriers to entry for would-be competitors. The self-learning features in SpeechWorks systems ensure its voice solutions get “smarter” the more they are used. Thus, the company’s spectacular market momentum should enable it to continue to widen its performance gap over competitors as it realizes our growth projections. SpeechWorks is a pure play on the following growth trends, which, in our view, should mean average annual growth of at least 70% is possible over the next few years.

• 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 relationship management (CRM) solutions to reduce costs, improve customer satisfaction and loyalty; • Voice Web Interfaces for Wireless Data navigation and use of special purpose voice portals to access information via wireline and wireless phones; and • mCommerce and the increasing use of telephone to initiate transactions, check orders and inventories.

Investment Risks Among the risks are: (1) a limited period of operations and no history of profitability; (2) fluctuation in quarterly results from its reliance on quarterly software licenses; (3) acceptance of emerging 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 expansion strategy; (5) ability to integrate current and future acquisitions; (6) dependence on distribution partners to generate at least 40% of quarterly sales, including the inability to time large orders associated with sales of new equipment; (7) ability to adopt to evolving industry standards, such as VoiceXML and the risk these standards present to the value-proposition of SpeechWorks’ core recognition engine; and (8) competition intensifying as the market for these products takes off.

Robertson Stephens, Inc. 71 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 2004E Direct $4.2 $4.3 $4.6 $6.5 $6.9 $8.2 $9.0 $10.1 $12.0 $19.6 $34.2 Indirect 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 62.7 100.4 145.5 Services 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 71.0 Other 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 0.0 Revenues 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 58.2 101.5 154.5 216.5 License % 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 2.9 Cost 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 47.6 Cost 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 50.5 Licenses 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 98.4 142.6 Services 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 23.4 Other 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 0.0 Gross 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 72.0 114.4 166.1 Gross 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 76.2 Research 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 34.2 General 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 84.2 110.2 137.7 Opex 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 28.3 EBITA 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 10.0 Other Income 0.0 0.0 0.0 0.0 0.0 0.0 Pretax 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 Intellectual (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) Property Rights 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) 12.7 Earnings 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 $0.50 Trailing 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 Analysis Revenue Mix License 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/Q License 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/Y License 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 2003E FY December Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Operating 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) $0.1 Depreciation 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 0.5 Other 0.0 Total (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 Requirements Net 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 3.4 Software Development Other (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 0.0 Total 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: Dividends Net 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 Capital Short-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 0.0 Long-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 0.0 Redeemable 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 0.0 Equity (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) 0.0 Total 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 Summary Quarter 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) by (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) Operations + 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 0.5 Increase 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 $0.01 Funds 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

Source: Company reports and Robertson Stephens estimates. Figure 37: SPEECHWORKS INTERNATIONAL—RETURN ON INVESTED CAPITAL (ROIC) ($ in millions)

2000  2001E  2002E  2003E FY 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 8.5 TTM 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) 2.0 Incremental 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 86.0 Excess 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 13.6 Incremental 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%

Source: Company reports and Robertson Stephens estimates. January 26, 2001 SpeechWorks International Inc. SPWX $41.94 Marianne Wolk 212.407.0427 Rating: Buy Candace K. Bryan 212.610.6109

Change in . . . Yes/No Was Is FY December 2000 2001 E 2001 E Rating: 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 NM Fully Diluted Shares Outstanding (MM): 30.2 Market Cap (MM): $1,266.6 Average Daily Volume (000): NA Revenues (MM): 2000 2001 E 2002 E Book Value/Share 12/00: $4.36 1Q $5.1 $11.3 $21.3 3-Year Secular Growth Rate: 100.00% 2Q $6.0 $13.7 $24.6 Dividend/Yield: None/None 3Q $8.6 $16.2 $27.7 Price/Book Value 12/00: 9.6x 4Q $10.6 $18.9 $32.3 Net Cash 12/00 (MM): $112.8 Year $30.3 $60.0 $106.0 Net Cash/Share 12/00: $3.74 Eqty Mkt/Rev NM 21.1x 11.9x

• SpeechWorks Reports Strong December Quarter. SpeechWorks reported Q4 results of $10.6 million and $(0.17), both above our $9.6 million and $(0.20) estimates. License sales of $6.1 million well exceeded our $5-million estimate, resulting in better-than-expected gross margins of 71% (versus our 68% estimate). The cash balance remained healthy at $113.6 million, while DSOs 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 results announcement, SpeechWorks announced new wins at Checkfreea (CKFR $49), GMAC Commercial Mortgage and Thrifty Rental Car, and follow-on wins at Continental Airlines and Audiopoint. As the prevalence of voice-enabling technologies grows worldwide, we believe SpeechWorks is close to being able to announce important new international wins—perhaps as early as sometime in the next few weeks. We also expect wireless carriers will be an important customer group to watch going forward, as carriers look for voice solutions ranging from voice dialing and directory assistance to voice portal capabilities.

• With the Stock Up Significantly Since January 9 and an 18-Million Share Lock-Up Release on Monday January 29, We Think SpeechWorks Could Be Volatile Near Term. We believe SpeechWorks’ rocketing valuation and the pending increase of its float could leave it vulnerable near term. We size the supply coming to market at perhaps 1–3 million of the 18 million shares to be released, assuming the stock due next week is mainly held by officers (approximately 5 million shares) that are subject to Rule 144 volume restrictions and VCs (approximately 11 million). In light of SpeechWorks’ strong Q4 results, solid momentum and visibility, we continue to 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 the rapidly evolving voice industry and any weakness related to the increase in its float should represent 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

Robertson Stephens, Inc. 75 continuing to execute well against its long-term goal of a 50/50 North American/International revenue mix. We believe the company’s strongest international presence is in the AsiaPac region—particularly in Korea and Singapore and increasingly so in Australia. We believe Europe is a focus area for the company, especially as it evolves into a more robust market for voice solutions. Though SpeechWorks faces tough competition in Europe from Philips and Nuance, we believe 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 international presence. Though historical partner InterVoice-Brite remains the company’s most significant distributor (represented 14% of Q4 revenues), we believe a broadening range of partnerships with ASPs, systems integrators and communication systems vendors will play an important role in the continued broadened distribution of SpeechWorks’ technology. For the fourth quarter and full-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 low exposure (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. Though the bulk of revenues are generated from large enterprises (40–50%), carriers (25–30%) and portals like AOL and Yahoo! (15–20%), we are glad to see SpeechWorks taking such prudent reserve 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 to continue taking additional reserves for the next 1–2 quarters.

• Raising 2001 and 2002 Top-Line Estimates to Reflect Acquisition; Maintaining EPS Forecasts, but Excellent Visibility and Continuing Deal Momentum Should Signal Upside in 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 of Eloquent. 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 the SpeechWorks’ growing backlog, excellent visibility and continuing momentum with new and follow-on wins should provide upside to our estimates throughout 2001.

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

Investment Thesis SpeechWorks offers an end-to-end suite of voice solutions featuring infrastructure, applications and professional 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 service providers, enterprises and Internet customers. Blue-chip customers attesting the performance of SpeechWorks’ solutions include: MCI WorldCom, AOL, Yahoo!, Palm and Citigroup. We believe the speech-recognition software market, projected by Datamonitor to reach more than $1.2 billion by 2004, represents an even greater opportunity for SpeechWorks, $5–10 billion by 2005, when combined with voice applications and professional services. We believe SpeechWorks, along with competitors Nuance and Philips are likely to capture at least 70–85% market share longer term due to substantial barriers to entry for would-be competitors. The self-learning features in SpeechWorks systems ensure its voice solutions get “smarter” the more they are used. Thus, the company’s spectacular market momentum should enable it to continue to widen its performance gap over competitors as it realizes our growth projections. SpeechWorks is a pure play on the following growth trends, which, in our view, should mean average annual growth of at least 70% is possible over the next few years. Call Management and the rise in voice solutions to replace expensive operator, touch-tone and/or PBX routing. Rising demand for voice-automated call center and customer relationship management (CRM) solutions to reduce costs, improve customer satisfaction and loyalty; Voice Web Interfaces for Wireless Data navigation and use of special purpose voice portals to access information via wireline and wireless phones; and mCommerce and the increasing use of telephone to initiate transactions, check orders and inventories.

Investment Risks Among the risks are: (1) a limited period of operations and no history of profitability; (2) fluctuation in quarterly results stemming from its reliance on quarterly software licenses; (3) acceptance of emerging 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 expansion strategy; (5) ability to integrate current and future acquisitions; (6) dependence on distribution partners to generate at least 40% of quarterly sales, including the inability to time large orders associated with sales of new equipment; (7) ability to adopt to evolving industry standards, such as VoiceXML and the risk these standards present to the value-proposition of SpeechWorks’ core recognition engine; and (8) competition intensifying as the market for these products takes off.

Robertson Stephens, Inc. 77 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 C01 Licenses $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 $66.9 Services 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 36.5 Other 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 2.5 Revenues 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 60.0 105.9 License % 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 1.3 Cost 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 26.1 Cost 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 29.6 Licenses 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 65.6 Services 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 10.4 Other 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 0.4 Gross 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 76.4 Gross 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 47.6 Research 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 16.6 General 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 89.8 Opex 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 5.7 Other Income 0.0 0.0 0.0 0.0 0.0 Pretax 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) $0.00 Quarterly 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 Analysis Revenue Mix License 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/Q License 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/Y License 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)%

Source: Company reports and Robertson Stephens estimates. PRIVATE COMPANY PROFILES

Robertson Stephens, Inc. 79 BeVocal CEO, C. Mikael Berner www.bevocal.com

The Company BeVocal, founded in 1999, develops voice portal applications and services for telecommunications companies and enterprises. The company’s headquarters are in Sunnyvale, California. The company’s voice portal applications can be customized to deliver location-sensitive, personalized information to any user via any device. Investors in BeVocal include Mayfield Fund, U.S. Venture Partners, Technology Crossover Ventures, TransCosmos U.S.A. and individuals.

Products and Services BeVocal offers a hosting network and automated voice solutions including voice portal applications, voice infrastructure software, as well as commercial and developmental hosting. The company’s voice portal applications include a yellow-pages-type search engine, nationwide driving directions, flight and weather information, and news, stock quotes and entertainment information. This voice portal currently powers Qwest’s voice portal service and is in trial by Sprint PCS. This service can be demonstrated by dialing 1-800-4BVocal. BeVocal’s voice infrastructure software includes a development 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-sensitive information, providing extra value to enterprises and carriers. BeVocal uses VoiceXML, Nuance SpeechObjects and other voice technologies.

Partners Nuance, Natural MicroSystems

Customers Sprint PCS, Qwest

Robertson Stephens, Inc. 81 Conversay CEO, Steve Rondel www.conversay.com

The Company Conversay, 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 in handheld devices such as the PocketPC or a -based PDA. The company is headquartered in Redmond, Washington.

Products and Services Conversay offers a set of core speech technologies that enable interaction with network-based information. 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 into a variety of devices. The company is working with Samsung to develop a speech-enabled watchphone using this speech recognition software. This software is compatible with Openwave’s UP.Link Browser and the Windows CE platform.

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

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

Partners 3Coma, Integrated Information Systemsa,b, Openwave Systemsa,b, AirTrac, Samsung, Macromedia, CenterCom

82 Robertson Stephens, Inc. Etrieve etrieve CEO, Mike Maerz www.etrieve.com

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

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

Customers InFocus, Perkins Coie, Standard Insurance Company, Silicon Valley Bank

Partner Dialogic (an Intel Company), Parity Software, IronSpire, Tripwire

Robertson Stephens, Inc. 83 Gold Systems CEO, Terry Gold www.goldsys.com

The Company Gold Systems provides voice-enabled information retrieval solutions for customer service applications and enterprise communications. Based in Boulder, Colorado, the company designs and markets voice recognition solutions to the financial, health care, insurance, government, retail and telecommunications industries. The company was founded in 1991 and is backed by private investors, Sorenson Limited Partnership, Softbank Venture Capital and others.

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

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

84 Robertson Stephens, Inc. HeyAnita CEO, Sanjeev Kuwadekar www.heyanita.com

The Company HeyAnita 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 technology allows 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 Mobile Telecom, Net2Phone and TriGem Computer.

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

Technology Supported VoiceXML, VB, C++, Java

Customers HeyAnita’s voice portal is marketed to consumers.

Partners Dialogic, SpeechWorks, Telera, Net2Phone

Robertson Stephens, Inc. 85 Indicast CEO, Bob Osias www.indicast.com

The Company Indicast, located in Carlsbad, California, provides personalized audio Internet portals to wireless carriers, Web portal providers and large enterprises. Indicast allows users to create a personalized broadcast 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 Venture Management Associates.

Products The 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 utilizes VoiceXML technology. The technology uses simple and flexible voice commands that exist as production quality audio rather than synthetic text-to-speech. These voice commands allow users to navigate through their personalized audio content or all other audio content available. Indicast now provides content from more than 1,000 continuously updated audio topics, one of the largest audio content databases available on the Web.

Technology Partners Motorola, Nuance, Webley

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

Customers Centennial Communications

86 Robertson Stephens, Inc. Interactive Telesis CEO, Don Cameron www.interactivetelesis.com

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

Products and Services Interactive Telesis provides end-to-end voice-enabled services and solutions to enterprises. Its VoiceVault service is a voice-hosting utility for enterprises that are seeking to voice enable their Web-based eCommerce or information services. InvestorREACH is an automated IVR system designed 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. These solutions use the VoiceXML language for speech recognition.

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

Partners Nuance, SpeechWorks

Robertson Stephens, Inc. 87 Phonetic Systems Co-Founder, Hezi Resnekov www.phoneticsystems.com

The Company Founded 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 1,000,000 records). These solutions can be integrated into existing PBX and other call center systems for customer care and marketing applications. The company is headquartered in Burlington, Massachusetts, with its research and development office in Israel. Funding has come from DS Polaris Ltd., Magnum Communications Fund, Formula Ventures LP and Sadot Research and Development Ltd.

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

Customers Phonetic 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.

Partners Sonera, Siemens, Natural Microsystems, Dialogic, Foresight Technology

88 Robertson Stephens, Inc. Sky Flow CEO, Nibha Aggarwal www.skyflow.com

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

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

Partners SpeechWorks, Nuance

Customers None listed at this time

Robertson Stephens, Inc. 89 Talk2 CEO, Brian Charlesworth www.talk2.com

The Company Founded 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’s corporate firewall for security. Investors include Oraclea and Hewlett-Packard, Smart Technology Ventures, New Media Venture Partners, Bluevector, Dominion Ventures, Sun America Investments and Thomas Weisel Partners. Talk2 is headquartered in Salt Lake City, Utah.

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

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

90 Robertson Stephens, Inc. Telera President and CEO, Prem Uppaluru www.telera.com

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

Products and Services Telera’s hosted voice services give enterprises the ability to provide customers with eBusiness solutions over the phone in the same way that other hosted services provide eBusiness functionality over the Web. Applications include automated FAQs, catalogue “browsing,” and product availability queries, 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 IVR functionality under the control of enterprise-based Web Application Servers. Also included in Telera’s product suite are Network Routing, Network-based call queuing, Outbound Customer Notification and Management Reporting.

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

Customers Aribaa, California Casualty, Covad, Sears, JC Penney, National Airlines

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

Robertson Stephens, Inc. 91 Tellme CEO, Mike McCue www.tellme.com

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

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

Products and Services Tellme is primarily known as a voice portal. Its interactive media service brings together the capabilities of the Web and the convenience of the telephone. By dialing 1-800-555-TELL users can speak 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 VoiceXML network integrated with AT&T backbone.

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

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

Customers ShopTalk Networks

92 Robertson Stephens, Inc. uReach CEO, Krishnamurty Kambhampathi www.ureach.com

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

Products The 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-enabled interface. Through a personal 800 number or local access number, users are able to access a wide range of applications such as address book, calendar and to do list. UReach offers it services through relationships with ILECs, CLECs, wireless carriers, ISPs and portals.

Partners iPrint.coma,b, Blue Mountain Arts, FreeAgent.com

Customers Blue Mountain Arts

Robertson Stephens, Inc. 93 VerbalTek CEO, Dr. James Pan www.verbaltek.com

The Company Headquartered in San Jose, California, VerbalTek develops technologies to enable voice recognition over 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 recognition would allow these devices to become truly unified communication devices. The company hopes to capitalize on the difficulty of key entry for Asian character-based languages by providing quick access to information via spoken command recognition in Chinese, Japanese, Korean and other languages to be developed.

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

Products and Services VerbalTek’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 and eventually even compose and read e-mails with spoken commands.

• VerbalNET: This voice-enabled search engine solution allows service providers and handset manufacturers to provide end users with a specialized feature—the ability to retrieve Web-based information via speech. This solution does not require a voice portal and the technology can be integrated into any microbrowser including WAP, iMode and Windows CE Internet Explorer. VerbalNET supports multiple languages including English, Chinese, Japanese, Korean and German. • 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 program certain commands to be associated with certain phone numbers or applications. For example, a user could program the phone to call home when it recognized the phrase “Call Grover” or to find airline reservations when it recognized the phrase “I’ so jet lagged.” Partners Telepaq Technology, mvion, Sina.com, High-Tech Computer Corp., Acer, Palmax, Internova

94 Robertson Stephens, Inc. VoiceGenie CEO, Vahan Kololian www.voicegenie.com

The Company Located in Toronto, Canada, VoiceGenie builds and deploys infrastructure that enables voice access to 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 blind people to access the Internet through a voice interface over standard telephones. Now VoiceGenie offers this solution to enterprises seeking to create valuable voice services for traveling professionals or customer service applications.

Products VoiceGenie’s VoiceXML Gateway is a Web-enabled Computer Telephony Integration technology that 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 end user. This Gateway platform supports ASR and TTS solutions from many vendors including AT&T and Nuance so that it is vendor independent.

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

Partners Lucent, Dialogic, Nuance, SpeechWorks, Cable and Wireless, Sonus Networks

Customers AT&T, Lucent, Openwave, Wildfire, Brience, Deloitte Consulting, Phone2Networks

Robertson Stephens, Inc. 95 Voxeo CEO, Gary Reback www.voxeo.com

The Company Voxeo provides middleware between the telephone network and the Internet to manage phone applications such as unified messaging and voice-based access to Web content. The company was founded in 1999 and has built a nationwide network to run its phone-based software. Voxeo is funded by Crosspoint Venture Partners and Mayfield.

Products Voxeo has built a network that runs from Boston to Los Angeles with 10 redundant call centers located across the United States. The company plans to use this network to provide access via any phone to specialized voice application servers. This technology can be used by Internet businesses to leverage their Web-based content and services or by voice portals and voice-based e-mail retrieval systems. This network has the capability to allow local service to 150 U.S. cities and nationwide access to 800 and 900 numbers.

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

Partners Because 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-powered network. Partners include Allairea,b, RadVision, SilverStreama,b and Snowshoe Networks.

Customers Just out of stealth mode, the company indicates it has more than 15 customers including Postini, an e-mail-retrieval company

96 Robertson Stephens, Inc. Wavemakers CEO, Peter van der Gracht www.wavemakers.com

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

Products and Services The company’s product, CLEARSTEAM, separates speech from background noise and interference to allow speech-recognition software to work more accurately. The product is unique because it can work 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 believes Clarity is also a partner as they are more focused on improving voice quality.

Technology Supported The 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.

Robertson Stephens, Inc. 97 Webley Systems CEO, Pat Mathis www.webley.com

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

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

Webley offers both a consumer service and a more comprehensive corporate service. The consumer service is priced on a per-month and per-minute fee basis. Each user is given an 800 number 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 per minute for each line included. The corporate service acts as a receptionist that keeps all team members in contact all of the time. The Webley Corporate assistant can set up conference calls and track 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 per each additional “sub-box.” Per-minute fees are the same as above.

Customers Yellowpages.com and individual users.

98 Robertson Stephens, Inc. Webversa CEO, Janet Wylie www.webversa.com

The Company Webversa develops voice-enabling solutions for enterprises that enable mobile professionals to have anytime anywhere access to Web sites, databases and corporate applications by voice command. The company’s headquarters are in Fairfax, Virginia. Founded in 1997, Webversa closed its 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@PNC recently announced that it would provide working capital financing for Webversa.

Products and Services Webversa aims to extend eBusiness beyond the PC and laptop. Using Webversa’s enabling technology, users can navigate Web sites and corporate databases from any telephone and will have 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 licenses this technology to enterprises as well as providing a hosted service for lower capital outlay.

Partners Nuance, Intel Online Services and Dialogic (an Intel Company), SpeechWorks

Customers Penguin Radio, i411, Alerts.com, Inphomatch

Robertson Stephens, Inc. 99 This research report is a product of Robertson Stephens, Inc.

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Copyright  2001 Robertson Stephens Global Director of Research John Rohal 415.693.3244 Robertson Stephens Research Coverage U.S.Dire Directorctor of U.S.Research of Research Barry Barry Tarasoff Tarasoff 415.693.3442 415.693.3442

INTERNET TECHNOLOGY cont. Business-to-Business eCommerce European Technology Services Eric B. Upin 415.693.3441 Jason D. Brueschke +44 (0) 20.7798.6391 Carey L. Jennings 415.248.4025 Network Storage Systems and Software Michael J. Beckwith 415.248.4540 Dane E. Lewis 415.248.4071 Betty Y. Chen 415.248.4440 Connie Pon 415.248.4890 Kristen B. Schaeffer 415.623.7543 Evren Dogan 415.248.4705 eCommerce Infrastructure Services Semiconductor Devices/Computer Systems/Storage Richard A. Juarez 415.248.4660 Eric Rothdeutsch 415.693.3241 Michael T. Alic 415.248.4304 Peter M. Karazeris 415.676.2865 Chetan S. Karkhanis 415.248.4711 Tai Nguyen Brett D. Johnson 415.623.7542 Neal R. Gorenflo 415.248.4959 eConsumer Semiconductor Equipment/Foundries Lauren Cooks Levitan 415.693.3309 Sue Billat 650.289.7226 Michael Cibula 415.693.3467 Suresh Balaraman 650.289.7228 William Urda 415.676.2868 Heidi Poon 650.289.7229 Arthur Wu 415.248.4717 Emma Park 650.289.7217 Melissa Tang 415.623.7540 Wireless Data/eCommunications eCredit & Lending/I-Auto Marianne Wolk 212.407.0427 Jordan Hymowitz 415.248.4610 Candace Bryan 212.610.6109 Michael Gaul 415.248.4851 Malindi Davies 212.407.0286 eFinance Scott W. Appleby 415.248.4202 TELECOM SERVICES Richard B. Shane Jr. 415.693.3519 Daniel P. Meyer 415.248.4715 European Telecom Services eHealth Bill Dixon +44 (0) 20.7798.6363 Sheryl R. Skolnick, Ph.D. 212.407.0418 Telecom Services Martine Gilbert 212.407.0294 Jim Friedland 415.248.4940 Chantelle Streete 212.407.0273 Ryan D. Weidenmiller 415.676.2849 eProcessing/ePayment Andrew W. Jeffrey, CFA 415.676.2731 HEALTH CARE Mort Sebt 415.248.4254 Dan Fannon 415.676.2732 Biopharmaceuticals eServices Jay B. Silverman 212.407.0420 Eric Shen, M.D. 212.407.0269 Steven S. Birer 415.248.4091 Jia Yang Joseph A. Vafi 415.248.4977 Gregory J. Zwakman 415.248.4038 Biopharmaceuticals Douglas N. MacBean 415.248.4888 Michael G. King Jr. 212.407.0248 European Internet and eCommerce Edward A. Tenthoff 212.407.0272 Steven D. Harr 212.610.6130 Derek J. Brown +44 (0) 20.7798.6380 Ellen A. Lubman 212.610.6104 Stephen A. Farrugia Internet & eCommerce Applications European Life Sciences Sam Williams, Ph.D. +44 (0) 20.7798.6385 Alex W. Baluta 415.676.2713 Karl Hanks Andy Savitz 415.693.3542 Mark Perutz 415.248.4970 Health Care Services Internet and New Media Sheryl R. Skolnick, Ph.D. 212.407.0418 Martine Gilbert 212.407.0294 Lowell J. Singer 415.676.2769 Chantelle Streete 212.407.0273 A. Sasa Zorovic, Ph.D. 415.248.4737 Kevin Samuelson 415.248.4078 Large Capitalization/Specialty Pharmaceuticals Arthur Wu 415.248.4717 Robert C. Hazlett III 212.610.6101 Knowledge Technologies Jason Cohen 212.610.6171 Cindy Hope Hatstadt 212.407.0292 Medical Devices/Medical Technologies Christine V.Shim 212.407.0293 Wade H. King, M.D. 415.693.3434 Wireless Data/eCommunications Christine M. Pui 415.248.4325 Anjali Shah 415.248.4583 Marianne Wolk 212.407.0427 Candace Bryan 212.610.6109 Malindi Davies 212.407.0286 RETAILING/CONSUMER PRODUCTS Broadline Retailing: Discount and Department Stores TECHNOLOGY Bill Dreher 212.407.0413 Communications/Networking Multichannel Consumer Hard Goods Paul Johnson, CFA 212.407.0415 Alexandra M. DalPan, CFA 212.407.0434 Ara Mizrakjian 212.407.0406 Carolyn M. Capaccio, CFA Peter Carrillo 212.407.0444 Aleksandra Mandich 212.610.6112 Sachin Divecha 212.407.0404 Specialty/Apparel Retailing Eileen M. Segall 212.407.0402 Janet Joseph Kloppenburg 212.407.0410 Communications/Networking Meghan M. Crotty 212.407.0250 Paul Silverstein 212.407.0440 Carla M. Funari 212.407.0298 Eileen M. Segall 212.407.0402 Elizabeth A. Montgomery 212.407.0243 Sachin Divecha 212.407.0404 Communications Components/Semiconductor Devices RESTAURANTS/FOOD Arun Veerappan 415.693.3391 Restaurants/Food Tore Svanberg 415.248.4266 Andrew M. Barish 415.693.3429 Victor Lim 415.676.2707 F. Fitzhugh Taylor III 415.248.4676 Igor Ilic 415.693.3440 Matthew G. McKay, CFA 415.693.3249 Eugene Seki 415.693.3307 Jeremy Kwan 415.623.7544 Terence Whalen REAL ESTATE Tom Lavia REITs/REOCs/Real Estate Services Design Enabling Technologies Jay P. Leupp, CPA 415.693.3575 John O. Barr 212.407.0477 Paul R. Penney, CPA 415.693.3523 Lucas Bianchi David T. Copp 415.248.4204 Electronic Manufacturing Products and Services Jeffrey L. Mayer J. Keith Dunne, CFA 415.676.2756 David Alonso, CFA 415.248.4311 GAMING & LODGING Ofer Grinbaum 415.693.3274 Energy Technology and Services Gaming & Lodging Eric A. Prouty 415.693.3485 Harry C. Curtis, CFA 212.407.0251 Lisa M. Callahan 415.248.4738 Smedes Rose 212.407.0408 Gloria Fu 212.610.6111 European Communications/Networking Carmelo Bonaccorso +44 (0) 20.7798.6369 SERVICES Nicklas Gustafsson +44 (0) 20.7798.6377 European Media Financial Services Michael Graham, CFA +44 (0) 20.7798.6360 Justin Hughes, CFA 415.248.4595 Paul Oppenheim +44 (0) 20.7798.6678 IT Services Arthur Wu 415.248.4717 Steven S. Birer 415.248.4091 European Semiconductor Capital Equipment Joseph A. Vafi 415.248.4977 Scott Ingham, Ph.D. +44 (0) 20.7798.6378 Gregory J. Zwakman 415.248.4038 European Semiconductor Design and Devices Douglas N. MacBean 415.248.4888 Gary Kelly, ACA +44 (0) 20.7798.6370 Marianne Wolk Marianne, a managing director, specializes in technology solutions for the converging communications industry. Her areas of expertise include communication software and services such as wireless data and telecom operation support systems. Marianne has had a decade of buy- and sell-side research experience in the technology industry. Marianne is a Wall Street Journal All-Star Analyst and has been ranked by Greenwich Associates as a leading industry analyst. Marianne received a BA in applied mathematics from Northwestern University and an MBA in finance and economics from the University of Chicago.

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