state of California, and subsequently reincorporated in March 2000 in the state of Delaware. Our principal executive offices are located at 1380 Willow Road, Menlo Park, California 94025. Our telephone number at that address is (650) 847-0000 and our Common Stock is traded on the NASDAQ National Market under the ticker symbol “NUAN.”
Industry Background
One of the greatest challenges facing companies today is managing interactions with customers, prospects, employees, vendors and the third-party resellers. These interactions are increasing in volume, especially via the telephone. Managing this growing number of interactions using human customer service agents creates significant expense and ensuring an optimal customer experience is becoming a key business consideration with today’s renewed focus on retention, growth, and differentiation.
Many businesses have invested in touch-tone based interactive voice response (“IVR”) systems in order to address this problem. The touch-tone method, however, typically does not maximize automation potential. Because touch-tone interfaces can be ineffective and frustrating, user satisfaction can be low and dissatisfied users tend to opt out of the system to reach a live agent. Similarly, many businesses have invested billions of dollars in Web self-service systems in the hope that consumers would use the Internet instead of the telephone as a means to obtain information and transact business. According to industry analysts, however, the overwhelming majority of all interactions between businesses and customers still happen via the telephone.
Industry research reveals that consumers prefer the telephone as a means of interacting with businesses regardless of the age, gender or profession of the consumer. In order to handle the growing volume of customer interactions cost effectively, businesses need to automate telephone interactions. Automating these interactions using speech software is one of the most powerful, user-friendly and efficient means by which to accomplish this goal.
The Nuance Solution
We develop, market and support voice automation solutions for conducting interactions over the telephone for a range of industries and applications. Our products include speech recognition software, which is used to recognize what a person says, deliver responses and information and perform transactions; text-to-speech synthesis software, which converts information, for example, from a database, email or web page into an audio signal for delivery over the telephone; voice authentication software, which is used to provide secure access to information, on a relatively secure basis, by verifying the identity of speakers using the unique qualities of their voices; pre-packaged speech applications, that, for instance, efficiently route callers to specific destinations within a company, and reduce deployment time and cost; and a standards-based software platform designed as a foundation for voice system deployment and management.
We seek to actively support both emerging industry standards as well as proprietary development environments. Our software is designed to work with Voice eXtensible Markup Language, referred to in this document as (“VoiceXML”), the recognized industry standard language for the creation of voice-driven products and services. We also offer a range of consulting, support and education services that enable our customers and third-party resellers and channel partners to develop voice automation applications that use our software products.
Products and Services
Our product line consists of speech recognition, voice authentication and text-to-speech engines, a voice platform and pre-packaged applications. We also offer professional services to facilitate the development, implementation and support of applications operating with our software.
Engines
Our speech recognition software provides speech recognition and natural language understanding capabilities, enabling recognition and understanding of both simple, directed responses, such as “yes” and “no,” as well as complex, conversational requests, such as “I want to find out how much I owe on my account” or “How do I find a store near me?”. The software is designed to operate on standard CPU hardware architectures and operating systems, such as UNIX and Windows, within a variety of leading touch tone IVR systems. Nuance 8 offers numerous advanced features and capabilities that enable the highly accurate, engaging and easy-to-use applications. For example, applications built using Nuance’s Say Anything™ technology allow callers to speak more freely and naturally when interacting with voice-driven systems. Listen & Learn™ enables speech recognition systems to automatically adapt to the unique speech characteristics of a broad customer base. Finally, AccuBurst™ optimizes the utilization of system resources during non-peak periods for improved performance.
Nuance Verifier software uses the unique characteristics of a person’s voice to authenticate their identity. Users enroll voiceprints by speaking information requested by the application. The software is then able to authenticate the caller’s claimed identity by comparing his speech to the previously enrolled voiceprint. Nuance Verifier is tightly integrated with Nuance’s speech recognition engine and operates within the same distributed architecture, allowing for scalability and robustness, as well as simultaneous recognition and identity verification.
Nuance Vocalizer software converts text to speech. This software enables companies to deploy new and complex applications that require the reading of text from a variety of data sources and devices. Applications such as reading email, reviewing appointments from a desktop calendar, checking sales data or accessing stock quotes and bank accounts can be created with this product. Nuance Vocalizer eliminates the jarring transition between recorded prompts and text-to-speech output in speech based applications with our Speak As One™ feature. Speak As One™ uses the same voice for text-to-speech synthesis as it uses for the recorded prompts, creating a virtually seamless caller experience.
Voice Platform
The Nuance Voice Platform (“NVP”) is an open, standards-based software platform, optimized for speech solutions. It leverages the success of Nuance Voice Web Server, our first generation platform, and is tightly integrated with our speech technology to ensure access to our most advanced features. It also takes full advantage of VoiceXML and the cost benefits of off-the-shelf hardware. The Nuance Voice Platform is comprised of four major components:
Nuance Conversation Server: The Nuance Conversation Server allows the system to integrate with the telephony network, and enables VoiceXML based speech interactions by leveraging our industry leading speech technologies.
Nuance Management Station: Powerful operations, administration and maintenance (OA&M) capabilities are available with the Nuance Management Station. Advanced performance management and reporting features allow system administrators and operators to efficiently manage and maintain all aspects of their speech systems to ensure high service availability. At the same time, business managers can assess how well the system is delivering on key company objectives through features like the ROI Tracker™.
Nuance Application Environment: The Nuance Application Environment accelerates the creation of voice applications with intuitive easy-to-use development tools that accommodate touch tone IVR application developers, as well as those more familiar with Web technologies and programming. In addition, the Nuance Application Environment facilitates integration with back-end web-based infrastructure and legacy systems.
Nuance Computer Telephony Integration (CTI) Gateway: Enables rapid integration of the Nuance Voice Platform with CTI systems provided by a range of vendors.
Applications
In 2003, we introduced our first application, Nuance Call Steering (“NCS”). With Nuance Call Steering, callers can speak naturally and then be routed quickly to the correct destination.
Nuance Call Steering serves as a gateway to an organization’s contact center, enabling companies to establish a single point of contact for customers. The product is robust and flexible, and provides enterprises and telecommunications service providers with the ability to rapidly and cost-effectively gain the benefits of voice automation. In 2004, we introduced our second pre-packaged application, Nuance Caller Authentication, leveraging our Verifier engine. This application enables companies to quickly and easily display a caller authentication capability in its call center.
Services
Professional Services. We offer professional services for customer projects, and believe that our experience in the design and deployment of voice interface systems is of substantial value to our customers, providing us with a competitive advantage. Professional services offerings include prototype development, user interface design, grammar development, system testing, performance optimization and end-user acceptance studies, as well as education services through our Speech University program.
Technical Support and Maintenance. We offer technical support services for customers and third-party resellers to assist with the development, integration and operation of our software products. We also offer maintenance services to our customers, which consist of upgrades and enhancements to our software, as well as telephone support.
Customers
We license our software to a broad range of companies and organizations, including those in the telecommunications, and financial services, travel and hospitality, retail, insurance and utilities industries. As of December 31, 2004, we had licensed software and/or services to more than 1,000 corporate enterprises and telecommunications carriers around the world.
Sales
We license our products both directly through our sales force and indirectly through third-party resellers. As of December 31, 2004, we had 54 employees in sales and marketing serving the United States market and 28 employees in sales and marketing serving international markets. We also had sales offices in nine different countries. We license our products to customers in the United States, Canada, Europe, China and other countries in Asia and Latin America. The majority of our sales are made in the United States and Canada, accounting for 78%, 82% and 74% of our total revenue in 2004, 2003 and 2002, respectively. International revenues were $21.0 million, $21.7 million and $15.6 million for 2004, 2003 and 2002, respectively. As a percentage of total revenue, international revenues were 36%, 39% and 35% in 2004, 2003 and 2002, respectively. We anticipate that markets outside of the United States will continue to represent a significant portion of total future revenue. We support sales and marketing activities with respect to international licensing of our software and provision of our services. Almost all international sales are currently denominated in U.S. dollars. However, we may denominate increasing amounts of sales in foreign currencies in the future.
Our sales force focuses on generating demand for our products and services that is fulfilled either directly by us or indirectly through our third-party resellers. In 2004, 2003 and 2002, indirect sales contributed approximately 53%, 58% and 74%, respectively, of total revenue. We believe that, as the market for speech software solutions continues to develop, sales through our indirect channel will continue to represent meaningful percentages of total revenue.
Our third-party resellers increase our geographic sales coverage and address a range of market and application opportunities for our software. In addition, these third-party resellers provide end users of our software products with access to additional resources to design, install and customize applications. Our five largest resellers, based on revenue in 2004, were Nortel Networks Limited, Intervoice, Inc., International Business Machines Corporation, Edify Corporation (a subsidiary of S1 Corporation) and Syntellect, Inc.
For the year ended December 31, 2004, no customer accounted for more than 10% of total revenue. For the year ended December 31, 2003, Telus Communications accounted for 12% of total revenue. For the year ended December 31, 2002, Nortel Networks accounted for 10% of total revenue.
Marketing
Our marketing programs are designed to create awareness for our products and services and support our direct and indirect sales efforts. We have implemented an integrated mix of marketing activities, including product marketing, third-party reseller and channel partner marketing, corporate marketing and solutions and industry marketing.
Research and Development
To remain competitive in the voice software industry, we must continue to improve our speech products. Since our formation, we have invested significantly in developing and improving our core technologies, and related products. Our current research and development activities include improvements to all products including our speech recognition, voice authentication and text-to-speech engines, software platform and software applications. Our research and development expenses were $14.5, $15.3 million and $14.2 million in 2004, 2003 and 2002, respectively. As of December 31, 2004, we had 76 employees dedicated primarily to research and development.