In April, Microsoft announced plans to acquire Nuance Communications — self-described as “the pioneer in conversational AI innovations that bring intelligence to everyday work and life” — for $19.7 billion by the end of 2021.
While public investors will be losing this large, publicly-traded player in the $30 billion transcription market, a new one could go public in 2022.
That’s what I learned in my June 2 interview with Tom Livne, the CEO of Manhattan-based Verbit, a leader in artificial-intelligence enabled transcriptions for the legal, education, and media and entertainment industries.
Read on to learn more about how Microsoft intends to get a return on its investment in Nuance — whose service takes notes on meetings between doctors and patients, how this merger benefits Verbit — which announced June 8 that it had raised a $157 million series D round, and why Verbit appears to have bright prospects.
How Microsoft Will Make Nuance Payoff
Nuance stock has popped 135% since June 8, 2020. Sadly, its revenues have not done as well. Between 2017 and 2020, its top line declined at an 8% average annual rate to $1.48 billion.
Microsoft sees Nuance as a way to increase its Azure cloud services health care industry market share. How so? According to CNBC, Microsoft’s executive vice president for cloud and artificial intelligence, Scott Guthrie, expects to convert Nuance customers “into big users of Microsoft’s Azure cloud and strengthen its position relative to the market leader, Amazon.”
Microsoft has the potential to introduce Azure to Nuance’s many U.S. customers and to sell Nuance’s services to Azure’s many international ones. How so? In April Microsoft — which earned 49% of its revenues outside the U.S. — said that “55% of U.S. doctors and 77% of U.S. hospitals use Nuance, and 80% of its revenue came from the U.S. in its most recent fiscal year,” according to CNBC.
All this translates into a larger total addressable market for Azure. CFO Amy Hood said the deal expands Microsoft’s total addressable market in health care to $500 billion — a market which Deloitte forecasts will grow at a 5% compound annual rate between 2019 and 2023.
Why Microsoft’s Nuance Buy Is Good For Verbit
Verbit — about which I first wrote in February — says it is now valued at over $1 billion after raising a $157 million Series D. Investors in this round include “Sapphire Ventures, alongside new investors such as Third Point, More Capital, Lion Investment Partners, and ICON fund.”
Verbit — which recently acquired VITAC, the largest provider of captioning products and solutions in the U.S. — leads the professional transcription and captioning market. Its 1,500 customers in the “legal, media, education, government, and corporate sectors include CNBC, CNN, FOX, Harvard University, Stanford University, and Kaltura,” according to the company.
Livne sees the Nuance deal as good for Verbit’s valuation. As he told me on June 2, “Microsoft’s MSFT +1.2% pending acquisition of Nuance Communications NUAN 0.0% gives us a very good comparable — 14.3 times consensus revenue forecast. Nuance is a declining company and we are growing fast. The multiple for Verbit should be high.”
He does not see Nuance and Microsoft targeting Verbit’s customers. “Satya Nadella said that Nuance can help double the addressable market for Microsoft’s Azure health care cloud. Nuance gives them unique data sets. We are not in health care. We are in legal, education, and media and entertainment,” Livne explained.
Verbit’s Bright Prospects
Verbit says it’s growing fast “with 6x year-over-year revenue growth and close to $100 million in annual recurring revenue four years after starting the company.”
Livne is pleased with Verbit’s performance. “We are busy with execution. We have a good trajectory in a hot market and good [corporate customers]. The funding round was over-subscribed.”
Investors flocked to Verbit because it leads a large industry. “Why was the investment round over-subscribed? We are targeting a $30 billion total addressable market. Investors see us as the leader with the most advanced technology. We are on the way to $1 billion in the next few years. There is a lot of valuation to be created.”
Verbit’s rapid growth and market leadership is a result of its service which delivers customers more value than competing ones. As Livne said, “Why do customers purchase our product? It is easy to use; the quality of the product is high — 99% accuracy through a combination of artificial intelligence and 30,000 freelancers who make corrections that go into the customer’s speech engine.”
There’s more. “We execute on our promises; we have scaled to a lot of customers; and we have a unique product offering — for example, it enables a customer to tailor permissions for the specific content from each university; and we have built a world-class sales organization that is good at positioning our story, creating a brand,” he said.
Verbit is good at Peter Drucker’s basic reason for a company to exist — to get and keep customers. “Customers try our product and we deliver. The rest it history. We land and expand. Our net retention rate is 163%.”
Verbit aims “to be an independent company that goes public in 2022,” Livne told me.
And he’s enjoying the ride. “How do I feel? This is my baby and I am working really hard to make it successful. I will do what is in the best interest of the company.”
Originally published at forbes.com