Nestor Inc. lost $837,000 in 1999, a significant improvement from the previous year’s $5.3-million loss, according to financial results released by the Providence technology company last week. Nestor’s overall results for the year were hurt by a $1.9 million loss by its affiliate Nestor Traffic Systems Inc. Not considering the company’s share of those losses, Nestor made a slight profit of $645,000 in 1999.
The 17-year-old company uses artificial neural networks, which are designed to function in a manner similar to a human brain, to address complex software problems such as recognizing fraudulent credit card transactions.
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Nestor’s anti-fraud software for banks and financial institutions identifies suspicious transactions, not by applying a set of rules, but by experience. The technology is “trained” in a matter of minutes by feeding it three months worth of transactions and identifying the fraudulent ones, said Nestor President and Chief Executive Officer David Fox.
Animals have been equipped with neural networks for millions of years, but the artificial versions didn’t become a serious area of study until the late 1970s and early 1980s.
Nestor also makes neural network software capable of making predictions about a consumer’s online purchases for e-commerce firms.
The company announced last week that it had licensed its anti-fraud software to Toronto-based Royal Bank of Canada. And last month, it licensed the software to eSuccess Inc. of Surrey, British Columbia.
Fox couldn’t put a specific price tag on the two agreements because Nestor is paid on a per-transaction basis, but, he said, “All of our contracts are what we would call large contracts. For us, these are significant agreements.”
Nestor Traffic Systems, of which Nestor Inc. owns 42 percent, makes special camera systems that help manage traffic and record moving violations at intersections and railroad crossings. The CrossingGuard technology has been tapped in recent months by the Florida Department of Transportation; Falls Church, Va.; and DuPage County, Ill.
For its part, Nestor Inc. attracted 14 new contracts in 1999. The company’s sales of $5.1 million last year represent a 128 percent increase from $2.2 million in 1998. Fourth quarter sales alone more than quintupled to $1.3 million from $256,000 during the same period in 1998.
Fox chalked up the stronger results last year to easing of Y2K concerns. In 1998, many of the financial institutions that are Nestor’s core source of customers were too preoccupied with preparing for the date change to take on any new technology projects.
By last year, Fox said, many banks and credit card companies were Y2K compliant and receptive again to the idea of using neural networks to finger fraudulent transactions.
“It’s almost like we woke up from a sleep because Y2K hit us pretty hard,” he said.
Despite the brighter outlook, Nestor’s stock price has continued to languish. After spending the last year at or below $1 per share, Nestor shares traded above $3 per share in February.
The company’s main competitor in the area of fraud detection is HNC Software Corp., with which Nestor has been locked in a patent battle since late 1998.
Nestor filed a lawsuit against HNC in federal court at that time alleging, among other things, that the San Diego company had infringed one of Nestor’s patents. HNC fired back last summer by bringing a counterclaim against Nestor and its distributors alleging that, in fact, it was Nestor that had infringed on HNC’s patent.
Nestor amended its lawsuit in late January to drop the patent infringement claim and focus on its claim that the HNC patent on detecting fraud through predictive modeling is legally invalid. Fox doesn’t expect a resolution to the dispute anytime soon.
