Lionbridge (LIOX) is a microcap stock ($70 million market cap) and the world’s largest provider of translation services. It offers language translation (also known as localization) and application testing services to companies that sell their products and services into international markets. It also provides interpreter-based services for over 360 language and dialects, mainly to government agencies. Lionbridge has over 2,600 employees in 26 countries worldwide.
LIOX generates $450M in annual revenue and is expected to grow EPS to 15-cents in 2009. In this article, I will demonstrate why LIOX should significantly beat these analyst estimates despite the weak economy:
In this challenging environment, companies are looking for low-cost ways to generate incremental revenue. Recently, the ROI associated with international expansion has become much more attractive. Traditionally, international expansion has been difficult. Language barriers, supply chain visibility, and finding willing partners have historically been a challenge.
However, in recent years the internet and technology advances have increased supply chain visibility and made it easier to find international partners. However, when business was booming, international resellers and retailers had limited bandwidth to form new business arrangements. With demand weakening, those same resellers and retailers are becoming eager, if not anxious, to find new revenue sources. Finally, localization services have become quicker, easier, and more cost effective to use, also due to the internet and technology advancements.
With these lower barriers to international expansion, translation vendors are poised to benefit from this trend. Anecdotally, analyst firms are seeing a pickup in inquiries regarding language translation providers.
The market is fragmented and price competitive. Its most notable competitor is SDL International (UK) with $200M in revenue. They also compete with smaller companies like Translations.com, CLS Communications and Moravia. Beyond those vendors, the market is very fragmented, with hundreds of small regional players.
As the largest vendor in this space, LIOX enjoys the advantage of a high profile and economies of scale. Also, in a weak environment, vendors gravitate to stronger, more-viable suppliers. Being a public company provides customers with a view into the company’s financial health. From this perspective, LIOX is likely to gain share versus its smaller, less-viable competitors.
Lionbridge offers investors some very attractive characteristics:
- It currently trades at just 2.5x free cash flow. The company has produced an average of $15M in free cash flow over the past 3-years but that number ballooned to $29M over the past 12-months, with over $20M coming in the past 6-months alone. Operating efficiencies have been kicking in and additional initiatives promise to keep the cash rolling in (more on that below).
- Lionbridge has been using this excess cash flow to aggressively pay down its debt ($60M in Q3, down from $70 in Q2). The company is in good shape in this regard. The debt is part of a $100M revolving credit line that carries a 5.5% interest rate and won’t need to be renewed until late next year.
- 50% of its revenues get paid in U.S. dollars. However, about 70% of costs are in paid Euros, so a strong dollar is a big boost to profitability. New pricing initiatives will augment this, as will recent cost-cutting measures. Based on the dollar’s continued rise in Q4, I calculate that the company’s Q4 earnings could beat analyst estimates by 3-cents if they hit their internal revenue goals.
- Lionbridge is preparing to reap the rewards of a multi-year investment in a new software-as-a-service (SaaS) based translation platform. It just went live in the September quarter, so this will be a new source of revenue. In addition, now that the heavy lifting is done, R&D expenses should decline as a percent of sales. In an environment where upfront expenditures are being cut, this service should be attractive to customers and help the company gain market share. It will also enable Lionbridge to save money on manual labor, since the incremental cost of adding new customers to the platform is minimal. If this becomes even a modest percent of revenues, the impact on the company’s operating margins could be dramatic. Just a $2M quarterly contribution to operating margins could double its EPS.
- Lionbridge’s Top 10 customers include stable vendors like Microsoft (MSFT), Google (GOOG), Nokia (NOK) and Adobe (ADBE). Satisfaction and loyalty among these constituents appears to be high. LIOX was recently named Microsoft’s Vendor of the Year from a pool of 60,000 candidates. Meanwhile, Google has been a fast-growing customer (a 10% customer as of Q3). Multi-lingual advertising and localized search are two of technology’s fastest-growing areas and Google continues to aggressively attack these opportunities, benefiting LIOX.
- Virtually zero Financial Services exposure. LIOX is more focused on technology, life sciences and web translation.
- The company has $110M in U.S. net operating loss carry forwards (NOLs), so it won’t have to pay taxes for a very long time. It also has $96M in international NOL. While these aren’t likely to be used up in the near-term, its worldwide NOLs represent almost three-times its market cap. For a potential acquirer, this means that any operating synergies would be tax-free for several years.
Insider and Institutional Ownership
During the September/October selloff, companies with debt got hit especially hard. LIOX was no exception. Its shares fell 70%. However, with its strong cash generation and a dedication to paying down the debt, it appears that investors overreacted. The company responded by buying back shares. After that, four insiders joined in, purchasing over 200,000 shares in December. In addition, institutions currently own 83% of the company’s shares. This is an exceptionally high degree of institutional ownership, particularly for a microcap.
18-months ago, LIOX was trading at $6 per share. At 1.23, LIOX is selling for just 8x 2009 estimates (15 cents), which haven’t yet been adjusted to account for the stronger dollar. If the dollar remains at current levels, LIOX should generate an extra 12-cents in operating profits (which will be tax-protected by its NOLs). Add that to its new SaaS offering, expansion-related customer demand, and free cash flow generation, and you have a very cheap stock with several ways to grow earnings in the face of a tough economy.
Disclosure: Author holds a long position in LIOX