On the Record with Steve Chambers

Sometimes, success is all about being in the right place at the right time. Just look at high-flying SpeechWorks International .

While large companies like IBM and Lernout & Hauspie have toiled away for years with very mixed results in the speech recognition market, Speechworks has been able to quickly pop onto the scene and establish itself as a Wall St. favorite.

Unlike IBM or Lernout & Hauspie that are still stuck in the desktop end of the speech market, Speechworks has instead focused its efforts specifically on developing over-the-telephone speech recognition for the mobile device market.

The end result is that the company now boasts an impressive client list that includes the likes of E*TRADE , America Online , Yahoo and American Airlines among others. In addition, the company is backed by a top tier group of investors that includes Reuters , Intel and MCI Worldcom .

Since coming public at $20 a share back in mid-August of this year, SpeechWorks has watched it stock price more than quadruple to over $84 a share. With sales of only $8.6 million last quarter, the company now sports a lofty market capitalization of over $2.5 billion.

Even with over 200% annual sales growth and a growing customer list, one has to wonder if it’s only a matter of time before the fickle nature of Wall St. catches up with SpeechWorks? After all, sectors like Linux, business-to-business and even e-tailing stocks were once red hot as well.

With this in mind, we recently caught up with SpeechWorks International’s Vice President of Worldwide Marketing, Steve Chambers, to discuss how his company plans to live up to its lofty valuation.

ISR: Let’s begin this interview with a brief overview of SpeechWorks.

Chambers: We specialize in over-the-telephone speech recognition. That’s different than speech recognition on the desktop where you speak into a microphone and text then appears on the screen. We do very sophisticated applications. For example, you can now call American Airlines over the phone and using our technology check a flight schedule. Our speech recognition technology is called “speaker independent.” It works with anyone calling. You don’t have to train it and it works primarily over the telephone.

ISR: So your technology is very different than speech recognition companies like Lernout & Hauspie and IBM’s IBM Voice Systems that have so far just focused on the desktop PC market?

Chambers: Exactly. Our technology is much more industrial strength and more powerful than their solutions.

ISR: How do you make money? What’s the business model for Speechworks?

Chambers: We sell software by the “port”, which is the number of simultaneous speech technology actions that a company can conduct with customers. We sell ports of recognition software, text-to-speech software and speaker verification software. We also receive ongoing fees from clients when they add new ports and new capabilities like additional languages. There is also a fair share of maintenance that goes along with these software sales.

ISR: Okay. Speech recognition and natural language has been an area full of a lot of hype and expectations for years now. Why does this space finally seem to be taking off?

Chambers: I think it’s a combination of a few things. One reason for the sudden growth in speech technologies is the explosion in mobile phones. We’ve all been talking about the Web for so many years, but there are more new mobile phone subscriptions than Web subscriptions, particularly when you go overseas. More and more people want to use their phone to get information. The second thing is that we have this gigantic pool of Web content that can be used and delivered over the phone. People now want all of this infor

mation on the run. So speech is at the epicenter of the explosion of wireless, the Web and various consumer dynamics.

ISR: Let’s switch topics a bit and talk about your client list. Most investors are probably most familiar with the voice portal deal you did with Yahoo recently, but what are some other major clients?

Chambers: We have both America Online and Yahoo as clients, which are obviously large portals. We also have clients like American Airlines, Continental Airlines , Federal Express , Hewlett Packard and McKesson HBOC . These are typically giant enterprise companies who buy speech to basically cut costs by automating customer service and providing customers with instant information. So that’s pretty much the core customer base and a lot of what’s currently driving the speech market.

ISR: So the value proposition for clients is really a cost cutting and productivity play for the most part right now?

Chambers. Yes, it is. Now, we have introduced a way where they can make money and bring some top line revenue, but for the most part companies are looking at it as cost savings right now. If you are automating a call center, there is no reason that you can’t also automate the cross-sells and up-sells that happen in a call center as well. Companies could actually give you or me the opportunity to buy something if we’re calling a speech service.

ISR: Yes, definitely. You’re in a hot space right now, but what are the real barriers to entry in your business?

Chambers: There is a huge barrier to entry in the state of recognition. Building a recognizer that captures all of the data needed to recognize what people say in a particular language in the high ninety-percentile range takes a lot of time. You need to collect a lot of data. People can’t just start that from a cold start and expect to approach the accuracy rates of existing market leaders. Porting speech recognition and text-to-speech recognition to new languages is very difficult.

ISR: Right now, companies like IBM and Lernout & Hauspie are playing catch up in your slice of the speech technologies market, but you seem to constantly be going head-to-head with Nuance Communications on deals?

Chambers: Yes. It’s a nice east coast versus west coast rivalry! It is definitely a pretty head-to-head competition. We’re confident about how we’re doing. We won the AOL agreement head-to-head and that was a major deal. A lot of due diligence went into their decision. There are a number of other competing deals that we have won, but they are very competitive. It’s great to have two strong companies in the market.

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