ScanSoft (SSFT), a major supplier of digital imaging, speech, and language solutions--such as voice-related technologies for telecoms--to make businesses more productive, has been flying high. It reached 6.05 a share on July 2, up from 3 in early March--with a lofty price-earnings ratio of 30 on 2001's earnings of 19 cents a share, or 23 times estimated 2002 earnings of 26 cents. Enter the shorts. Selling at about five times revenues, they think the stock is too pricey. And there is the link to Xerox, which owns a 20% stake. Xerox, under a Securities & Exchange Commission accounting probe, is also a major ScanSoft customer (ScanSoft says the relationship with Xerox is conducted at "arm's length" and that it contributed "considerably less than 10%" to revenues in 2002). Xerox is restating up to $6 billion in revenues from 1997 to 2001. "Given the investor sensitivity to accounting, the restatement could cast a negative shadow on ScanSoft," says one pro, who sees the stock falling to 4. A bull on ScanSoft is Katherine Egbert, of C.E. Unterberg, who rates the stock a buy, with a 12-month target of 12. She sees 2002 earnings of 26 cents a share and 35 cents in 2003. Say the shorts: Her valuation is too steep.
Corrections and Clarifications
``Hard landing ahead for ScanSoft'' (Inside Wall Street, July 15) said that Xerox Corp., which owns 20% of ScanSoft, accounts for 14% of its revenues. ScanSoft says the relationship with Xerox is conducted ``at arm's length'' and that Xerox contributed ``substantially less than 10%'' to revenues in 2002.
By Gene G. Marcial