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Lionbridge Technologies, Inc (NASDAQ:LIOX)

Q4 2012 Earnings Call

February 13, 2013 09:00 am ET

Executives

Sara Buda – VP-Investor Relations

Rory Cowan – Chairman, President, Chief Executive Officer

Don Muir – Chief Financial Officer

Analysts

Amit Singh – Jefferies & Company

George Sutton – Craig-Hallum Capital

Ben Rose – Battle Road Research

Vincent Colicchio – Noble Financial Capital

Kevin Liu – B. Riley

Operator

Welcome and thank you for standing by. At this time, all participants are in listen-only mode until the question-and-answer portion of the conference. (Operator Instructions) The call is being recorded. If you have any objection, you may disconnect.

Now I’ll turn the call over to your host, Mrs. Sara Buda. Thank you, ma’am and you may begin.

Sara Buda

Thank you. Welcome everybody to the Lionbridge Investor Call to Discuss Financial Results for the Fourth Quarter and Fiscal year ended 2012. During this call, we may make certain statements that may be considered forward-looking statements under Federal Securities laws and which involve risks and uncertainties. Our actual future results may differ significantly from the matters discussed in any forward-looking statements. We’ve disclosed in greater detail in our Form 10-K filed March 13, 2012 and in subsequent filings the risks that may cause these risk and uncertainties.

And now I will turn the call over to Lionbridge’s Chairman and CEO, Rory Cowan.

Rory Cowan

Great. Thanks, Sara and welcome, everyone. And thanks for joining us today as we review year end results and really discuss our thoughts and outlook for 2013. I think – anyway you look at it 2012 was filled with lots of financial and qualitative achievements as well. For the full year, we delivered on revenue growth of about 7% and that’s about 9% in constant currency year-on-year. So, the investments in new offerings, new technologies and new markets are really beginning to show. Second, we delivered the highest net income in our history for both GAAP and adjusted earnings. GAAP EPS was bout $0.19 a share and adjusted earnings were about $0.46 a share, excluding restructuring and other items and you all know how we calculate that.

More than anything else though, I am also pleased that it’s really the quality of the earnings is really stronger than ever, very solid relationships with customers and very conservative in our approach to things here. The incremental revenue drove about a 30% conversion directly to operating profit year-over-year and we expect that sort of positive trend to continue as we go into 2013.

So, finally in 2012, we continued to generate cash with $19 million in cash flow in 2012, an increase of almost $10 million year-on-year. So, at all levels 2012 was a strong year from a financial perspective. As we completed the stages, the final stage of restructuring and turned our focus to growth, we started to see the power of our crowd in the cloud model and we expect moment to accelerate into 2013. So, I’ll talk about some of the qualitative or business milestones in the year and I just thought to put a little finer point on them.

First, we brought new value to our existing base of recurring revenue clients. As a result, each of our top three clients grew year-on-year. That’s an idea of land and expand as they say in the sales management world where we really are in these accounts and now we’re beginning to sell new services to new buyers within these large customers. And we added several new clients to our top 20, including and putting two, one is a mobile and consumer technology provider and also a large aerospace company. So, I’m proud of our global account teams and as you know we’ve proven our ability to continually expand large scale recurring relationships in global enterprises.

Second, in terms of new business we accelerated our new GMO offering or global marketing operations proving our ability to sell to new buyers in large enterprises and this is largely the marketing department rather than in the product development groups where we’ve had our traditional relationships.

We’ve entered new vertical markets with life sciences and manufacturing, from sales and delivery. Both are scaling nicely and we expect those to grow ahead of the company average in 2013. We also expanded our technology strategy for GeoFluent real-time translation with new partnerships for chat and forums.

We completed two tuck-in acquisitions, the first M&A for us in several years, PRI, which you remember extended our momentum in the U.S. industrial sector and Virtual Solutions which gave us a foothold in the state and local government market but more importantly gave us a very strong task management platform for crowdshoring or crowd in the cloud which I’ll talk about little bit later.

And finally, we continue to reduce our overhead expenses, including the closure of one of our more expensive European locales. And with the final phases of our restructuring plan lies behind us, we expect profits to expand further as revenue grows. And I would like to mention that we did all this while we noticed that some significant, many millions in revenue decline came from a large Finnish company, which of course we’ve offset with a new relationship with a Korean handset manufacturer. So, we’re managing that transition as well.

So, in sum, 2012 was a very busy year. I’m pleased with our achievements on all fronts and it feels as if we have the right strategy, the right model and right global platform to really accelerate revenue and earnings and growth into 2013 and beyond.

As for Q4, it was a solid workman-like quarter with almost a $114 million in revenue, $0.05 GAAP and about $0.06 ex-restructuring. We took a little more restructuring and we found some more things to do this quarter, so we just thought we’d go ahead and get it done. Don will walk you through more detail on the quarter of course and you’ll hear we ramped several new accounts. We accelerated the last phase of restructuring as I mentioned. So, overall, Q4 was a solid quarter and we expect to see both revenue and margin improvement as these programs ramp in 2013.

Let’s talk about the three priorities for 2013. It’s pretty simple actually. There are three key offerings that we’re working on. Our GMO, global marketing operations offering, a real-time machine translation technology and what I’m calling enterprise crowdshoring or a crowdsourcing model focused on large enterprises. So, let’s touch on each of these.

First, GMO. You’ll recall the GMO we took the skills we developed for managing complex translation programs and moved those upstream to the marketing buyer to create a complete outsource solution for managing global marketing campaigns and that’s operations and programs, so that’s e-mail campaigns and also sorts of micro sites and other website development. And this is where translation is a feature in a larger program. We launched the offering early in the year and exited 2012 with more than 25 clients over $20 million in revenue, well above our internal plan.

What we’re seeing is interesting, as the world moves from sort of analog to digital marketing, global marketing spend seems to be centralizing because you really treat Germany the same way you might treat German Town in Pennsylvania. So, you can manage the world from one location now, which vastly reduces global marketing expense and campaign execution challenges.

For 2013, we plan to extend the success of GMO with a suite of technology-enabled offerings from multilingual SEO, to video translation, to global e-mail campaigns. And you saw that we recently announced a partner program for GMO. While we’re providing the best-of-breed marketing technologies as part of a service offering, what we’re seeing is we’re finding in this volatile world of digital marketing there’s a lot of venture capital money and lots of startups in this space and customers are hesitated to commit to any one point solution until they know which one is going to scale and in fact we’re finding that it’s the services component that is more important than the actual technology platform that’s used.

So, many customers are coming to us and say, you give us the continuity of services and plug-in and plug-out all these interesting opportunities or interesting technologies in point solution. So then so that’s the reseller part. Some of these core technologies of course we’ll develop on our own that are core to our language like GeoFluent and others will oh yeah. So, we can knit together these various technologies within a long-term recurring services relationship without having to invest in these tools and this is the new services web. It’s a very exciting time for us and of course we know this well because we’ve been living in it for many, many years.

So, in general, I’m very pleased with our initial and ongoing attraction with our GMO offering and we expect to see that grow nicely in 2013.

So, the second new offering of course is GeoFluent. You’ve heard us talk about GeoFluent as real-time translation application for chat and forums. Clients for GeoFluent today and there are many clients for GeoFluent today and the pipeline is building very, very nicely, as we work with our chat partners and our forums partners. Now remember we started in the products space, GMO migrated upstream to the marketing space and GeoFluent is migrating downstream to the support for customer contact space.

So, in 2013, we’re also expanding GeoFluent to other offerings, including smart, automated translation or SAT as we call it and this targets big organizations with large scale documentation requirements. In this case, we apply our MT technology to provide large scale translation that is then post-edited by our crowd.

Unlike the traditional product localization offering, SaaS is focused on documentation, so a large bank that needs global compliance, for example, or large manufacturing company for with lots of their documentation. So, finance or the more mature industries tend to be focusing on this application. And course, so it fits with the heavy equipment manufacturers and other end markets that we’ve been investing in, in the Midwest of United States, that struggle with volume and complexity of multilingual support documentation. So, we have two further expansion opportunities, selling with our partners to enable real-time chat forums as the downstream, the support piece as well as selling to large enterprises as a technology-enabled solution for large scale documentation. So that’s evolving well.

The third new offering is what I’m calling enterprise crowdshoring rather than crowdsourcing. As you know, that Lionbridge has been providing a task-based global sort of crowd in the cloud for 10 years or so and this is everything from translation, to global search relevance, to in-country testing for the global release of technology products. All of these solutions rely on our virtual crowd of professionals that interact with a cloud-based work platform. We find, recruit, manage and pay our private crowd of workers in over 110 countries. So, we assemble the right combination of skills and cost and availability for individual customers that need a global response.

So, you hear a lot about the term of crowdsourcing these days and the applications of this concept can be very broad and often very consumer-oriented and sometimes kind of trivial, entertainment tonight seems to be crowdsouring every new vote on a celebrity dress and this is really very different than what we’re talking about.

Many of these crowdsourcing companies that are started up, they are trying to make money on everything but managing the project, be it the spread on payment terms, or be it trailing tax forms. For us crowdsourcing is another enterprise delivery model and we make our money focusing on the offering and managing it in a new low-cost and highly flexible manner. We managed private crowds of professionals worldwide that fulfill very specific requirements for our clients in a recurring revenue stream.

So, if you just model for over 15 years today our strategy is to take this global crowdshoring skills and apply this capability to other end markets. This led us to our November acquisition of Virtual Solutions and this tuck-in acquisition gave us two things, a very solid team that had been selling these solutions to state and local governments and a highly secure technology platform for managing crowd-based tasks, and the other bonus was it was based just here in Cambridge and so this team has integrated very, very nicely into our developments. So, the technology is as important if not more so than the revenue.

For the Virtual Solutions and our global crowdshoring expertise, we’ve got a number of active engagements for us to extend the crowd capability to other applications. From data entry, to data enrichment, to other aspects of this big data theme that’s sweeping the globe now, it’s clear that enterprises across industries are looking to crowdsourcing as a new alternative to BPO solutions that are real-estate heavy, offshore complex and often times have very high fixed expenses. And of course we’re uniquely positioned to capitalize on this growing demand.

So, in sum, 2013 is really focused on revenue growth for us. We’re growing our recurring revenue relationships within the world leading brands and we’re bringing new offerings to market, GMO, real-time translation and enterprise crowdsourcing. So, we expect this strategy to really stay focused till 2013 and 2014 should bring some very real profit momentum.

So I’ll turn it over to Don for the numbers on the quarter and the year.

Don Muir

Thanks Rory. Hello everyone. Today I’ll walk you through a review of FY ‘12 and the fourth quarter. Let me begin by reiterating Rory’s comments that 2012 was a very strong year financially as we achieved 7% revenue growth, expanded gross margins by roughly 50 basis points to 31.2%, grew GAAP earnings by over $49.5 million to $11.3 million and increased EPS by $0.16 versus $0.03 a year ago. In the fourth quarter revenue was $113.8 million for the quarter, a year-on-year increase of about $6.4 million or 6% from last year. Fourth quarter gross margin was about 30% reflecting segment mix and the startup of some new programs.

GAAP earnings were $0.05. This includes almost $1 million of restructuring in the quarter as we opportunistically took out a bit more cost in Europe at end year as Rory alluded to. So excluding the restructuring GAAP EPS was a solid $0.06. Non-GAAP adjusted net income was $6.3 million or $0.10 per share for the quarter, up $0.02 versus last year. Fourth quarter cash flow from operations was about $3 million and we ended the quarter with $26 million in cash so our balance sheet continues to be in very solid shape.

Now let me get into the details of a very positive 2012 results. For the full year 2012 we generated revenue of $457 million, this is an increase of 7% year-on-year. We achieved a number of customer successes in 2012. We saw a strong year-on-year revenue growth from our top two clients Microsoft and Google as well as several others in our top 10. Our top 10 accounts grew 7% year-on-year despite the expected weakness from a large Finnish telco equipment provider that we’ve talked about previously. In fact excluding them, the remaining top nine customers grew about 12% year-over-year.

So, we continue our track record of expanding our large recurring relationships, we also added Samsung to our top 10 client list this year and a large consumer device leader into that top 20. And we expected both of these accounts to be strategic growth accounts for us in 2013 as well. And looking at our $29 million of year-on-year revenue growth in 2012, roughly 70% of it came from existing accounts and about 30% of our growth came from new clients. So, our sales teams are delivering on both fronts. And I continue to be impressed with our ability to get our foot in the door with large strategic accounts and then steadily grow them into large relationships with recurring revenue and solid margins. It takes time but it works. From a segment standpoint, our GOC language business grew nicely at 7% while our GDT testing segment was up 9% year-on-year.

Looking at gross margins, total company margins were 31.2% for the year marking solid improvement from year ago. Gross margins in our GOC language business were 32.7% for the year, margins in GDT were 30.2% and gross margin in interpretations were 16.3%.

We continued to manage our operating expenses as well. Despite our investments in the business, our G&A increased less than a $1 million year-on-year and declined 90 basis points as a percentage of revenue from about 17.5% to about 16.6%. In fact, total below the gross margin line operating expenses ex-restructuring increased only $1.7 million or about 1.3% year-on-year and almost $30 million of year-on-year revenue growth. So we continue to prove the power of our operating model, 6% to 10% top line growth, solid year-on-year improvement in gross margins and minimal operating expense growth. This allows us to drive strong conversion of incremental revenue for operating profit and we expect this trend to continue for the full year 2013.

Moving down the P&L for 2012 other expense line was only about $1 million for the year as many of you know this is largely related to the currency impact of quarterly balance sheet evaluations. So we continue to manage our FX exposures quite well. As a result for your models going forward I’d expect about 250 K per quarter in other expense going forward which is a decrease from prior estimates.

For the full year we recorded tax benefit of $2.9 million. This benefit was largely driven by a second quarter acquisition to PRI and our fourth quarter acquisition of Virtual Solutions which in total generated about $4.4 million of deferred tax benefits resulting from the purchase price GAAP accounting associated with the recording of these intangible assets. Going forward, we currently expect our near term quarterly tax provision to be about 750 K and eventually expect our tax provision to settle in somewhere in the low 20s as a percentage of pre-tax earnings.

We drove recorded GAAP net income in 2012 of $11.3 million or $0.19 per share and that includes full year restructuring charges of about $4 million and a second quarter asset impairment write-down of about $4.2 million. For 2013,we expect restructuring expense of about $1 million for the year and maybe a bit more if we see something opportunistic.

I know many of you still track our adjusted non-GAAP net income as well, which excludes stock-based comp, amortization of acquisition related intangibles, restructuring and other charges. Non-GAAP adjusted net income for the year was also a record at $27.9 million or $0.46 per share.

So, we had strong earnings execution all round, revenue was growing and we are controlling our expenses. And restructuring is coming to a close. As a result, we continue to be in good position as we grow the top line in 2013.

So, moving to the balance sheet, we generated $19 million in operating cash flow in 2012, year-end bank debt was about $27 million and we ended the year with about $26 million in cash even after funding our acquisitions, supporting our restructuring efforts and investing in the business. So, we continue to use our capital wisely.

We did not buyback any stock in Q4 as we used our cash on funding the Virtual Solution’s acquisition for about $4 million and funding some European year-end restructuring. However, given our expected strong underlying cash flows, in 2013 we look at opportunities to be active in our repurchase program while continuing to pursue appropriate M&A opportunities.

DSOs were at 51 days, a slight increase from last year but still quite strong for a company that collects receivables in over 26 countries. In fact we had essentially zero bad debt write-offs in 2012 and I believe that during my five-year tenure as CFO while recognizing over $2 billion in revenue, we’ve had under 500k in bad debt write-offs. So, clearly our global teams continued to deliver high quality services that our clients value.

So, in summary, we delivered strong financial performance in 2012. Revenue grew 7% year-on-year with a nice balance of growth from new and existing accounts. We delivered record net income. We generated strong cash flow and as we begin 2013 we’re quite confident that we’ll continue to build on the momentum that we’ve established.

For Q1 we expect revenue in the range of between $115 million and $118 million with an eye toward our seasonally strong second quarter ramp. For 2013 we are reiterating our expectation for top line growth of 6% to 10%. We also expect gross margins to improve about 50 basis points from the average of 2012 as new programs ramp throughout the year and we expect minimal G&A growth. This should lead to operating income growth of approximately 30% to 40% year-on-year. So in summary we had a positive 2012 and 2013 is looking even stronger. I look forward to the New Year and back to you Rory.

Rory Cowan

Okay thanks John. I think you all get a sense of the positive momentum we are feeling here. I think a lot of the focus and the energy of the past couple of years is really coming together as we enter ‘13. So just four quick summary points. First, our top customers are growing, we’re driving strong profit growth and as we convert that incremental revenue to net income. We’re pursing new market opportunities that will capitalize on our skills and this crowd in the cloud management world is unique particularly because we manage it on a global scale. We treat the U.S. as just another country and of course we expect our strong cash flows to continue.

So with that summary I’ll open the call to questions.

Sara Buda

Operator you can begin questions now please.

Question-and-Answer Session

Operator

(Operator Instructions) One moment for the first question.

Rory Cowan

Operator, we show him to unmute here.

Operator

One moment please. Jason Kupferberg, your line is open.

Amit Singh – Jefferies & Company

Hi. This is Amit Singh for Jason Kupferberg. Just quickly talking a little bit about how the spending environment has changed over in the last few months since the last time you guys reported. Although your fiscal 2013 guidance has been reiterated. I just wanted to get a sense of what kind of spending environment are you witnessing among your clients do you see slight improvements since last quarter and as the clients are going through their budget setting process what sense are you getting for 2013 versus 2012 do you think it’s going to be better or similar?

Rory Cowan

Well thanks. That’s a great question because you’re right a lot of companies I’ve spoken to and I think we experience as well. During Q4 there is a little bit of a hesitation while everyone was distracted for a couple of weeks here. We didn’t see the real bookings and things accelerated again and as we started so far this year things are looking very, very firm as we go into the quarter. I think a couple of things you really have to think of it by end of market of course and then of course within each end market it’s the winners.

You’ve got four or five markets and you’ve got to pick the winner in each of those markets and each of those folks. For example in the aerospace industry we are with Rolls-Royce the engine people and they have a very firm forecast for us for 2013. And then also we do some things in Europe with Airbus as well and we’re involved in lot of their programs. So, the aerospace vertical seems to be pretty strong and that’s we do, I don’t know, 40 million, 50 million bucks in that vertical. So that’s a nice feel to it.

On the handset business, we were with through the 90s and through 90s through the first half of the sort of 2005 to 2009 we had very solid relationships with the Motorolas and Nokias of the world. As you know, their fortunes have turned. But now we have solid relationships with the two worldwide leaders, one based in Korea and the other on the West Coast. So, we’re picking up, we’re feeling good about those opportunities.

I think and then just in the general industrial segment I think we’re just executing better and I think that we have a unique model for them because we can deal with the entire publishing lifecycle versus all the individual point solutions that people are used to buy. You have to go to an HCL or a Wipro for any development or for testing and you go to someone else for the content offering, you go to someone else for the translation. What we’re finding is that the industrials are really beginning to push all this stuff together and that’s that land and expand that I talked about earlier. So, that’s feeling good as well.

Now on the traditional local business and Europe as well, I mean there is some hesitation. Again, Europe is too speed, there is Germany and everybody else and so our German teams are feeling quite firm and solid than everybody else. We’ve got a little concern about but nothing more than we’ve had in the past couple of years. We’re also focusing in Europe on some of the high-end retail accounts, some electric good accounts. And so given that they are global organizations, we’re not feeling spend concern from them. So, that’s a longer answer than you wanted but I think it’s by customer and by segment I think in general we’re feeling pretty positive.

Amit Singh – Jefferies & Company

Great. And just a follow-up on the pricing side, I think 2012 was I would think pretty consistent when it came to pricing among your customers. But based on this slightly positive outlook for 2013, should we expect or is any bids on your talks should we expect pricing to get better from here?

Rory Cowan

No I’d just keep the way it is because again it depends like customer depends on context or depends on offering. Look, we’re all just concerned about pricing. Unless you’re locked into an onshore Indian provider where as of course Indian expenses are going up and so many of those contracts at CPI inflators and so there’s some pricing, there’s cost pressure that’s forcing price pressure in some of those activities. But we’re going the other way, we’re managing our costs quite aggressively and with some of these new offerings, we’re seeing price quite firm and we’re not seeing any real knife fights the way we did maybe in 2009 and 2008. But people still talk about price of course.

Amit Singh – Jefferies & Company

Perfect, thank you.

Operator

The next question will come from George Sutton. Your line is now open, sir.

George Sutton – Craig-Hallum Capital

Thank you, Rory thanks for going through the three priorities and the detail you did. My question relates to that and as you look at the TAM relative to in particular GMO and the crowdshoring opportunities. How are you spending against those relative to your traditional translation offering?

Rory Cowan

That’s a great question. Just say we do as many I work for a large company and when we do our CapEx, when we present to our Board, we look at growth capital versus maintenance capital, so we are very aware. And what’s interesting about our for business is it does not really require much capital. It’s just a bunch of computers worldwide and generally leasehold improvements every four or five years the renew lease in some countries.

So the core business doesn’t take much capital. Now we’re doing some systems investment there, we’re rolling out a new worldwide cloud based time reporting systems where I am able to get as I enter ‘14 I hope to have near real time costing capabilities for wage and labor allocation and then as we go into ‘14 is going to really give us a tight control of cost. So that’s a big expense for the core business. Most of our capital will be going to the newer offerings, acquisitions and of course opportunities to start buyback.

George Sutton – Craig-Hallum Capital

Okay. And relative to some of your traditional competitors obviously you don’t have a lot of name brand competitors but those of you do seem to be shifting their initiatives a bit away from traditional translation. Is that creating opportunities for you?

Rory Cowan

That’s interesting to say that. I think because we’re a little broader and deeper, because we’re moving into some new DMUs or decision makers we’re seeing sort of joint ventures evolve. If you remember George when you first joined us we used to talk about this code and content. What’s unique about us is that we understand how content data bases behave the unstructured data base and because of our Indian engineering background we also understand how structure data bases behave. We’re one of the few players that puts unstructured and structured capabilities together.

We’re hearing in the market that people like HCL and Wunderman are trying to come together to have a joint venture or joint bids on various opportunities. So you can begin to see that we’re the one stop shop for services underneath which we had various technologies because other companies are trying to bring those respective skills together through joint bidding. And my experience with JVs is that they’re an inherently unstable model and so just as very rumor that we’re hearing says that I think we’ve got it right.

George Sutton – Craig-Hallum Capital

Okay. And lastly, one for Don relative to European restructuring in Q4, what sort of annual cost reduction should that suggest from that move specifically?

Rory Cowan

Yeah, we tend to look at these things, I’ll leave it to Don, but we tend to look at these things as about a year and half payback or so because Europe takes sometime. Sometimes some country can get it, does in nine month, sometimes other countries it takes a little bit longer. In addition, many of the more mature European economies are changing their restructuring policies as we speak. So, Spain has been a particularly inflexible economy as was France. Last year’s restructuring was largely centered around Spain – I’m sorry, around France and this year we’re beginning to focus on some of the other accounts.

So, like I said we’re going to be – the big chunk of it for now is done, but that doesn’t mean that we’re not going to be opportunistic and I don’t know you put a couple hundred thousand bucks in there or something. Some of it’s embedded in the business units themselves, sometimes your accountants are looking out of your, of course when you take it out of operations and put it into restructuring. So, sometimes they’re called out sometimes it’s not. Don, do you have anything to add?

Don Muir

No, I think you pretty much covered, Rory.

George Sutton – Craig-Hallum Capital

All right, thanks guys.

Rory Cowan

Okay.

Operator

Ben Rose. You may ask your question.

Ben Rose – Battle Road Research

Good morning. Couple of questions, looking out to 2013, Rory, with regard to the opportunities in GeoFluent, would you say that the opportunity is larger on the chat and forums side or with regard to the large scale translation of documentation that you mentioned?

Rory Cowan

Yeah, that’s I think in terms of our revenue of course, large scale documentation translation drives more revenue but probably has lower gross margins. The cat piece when you’re selling software for that of course that’s SaaS so that’s a much higher gross margin model but much smaller revenue. So, there it’s apples and peaches there, Ben, is what you’re looking at. Both of them feel good where we are today.

Ben Rose – Battle Road Research

Okay. And then I realize it’s early going on the Virtual Solution side but as you take that platform including the security aspects of it to both your existing clients and maybe some new clients, can you talk about some of the reaction that you are getting in terms of potential assignments on what you are calling crowdshoring?

Rory Cowan

Yeah, I think a couple of things. First, we’re spending Q1 probably the live mid Q2 buckling VeriTest management program into our global SAP based payments program, because I think that was their weakness. They have strong task management that was quite generic and customizable, we had very strong payment capabilities for services worldwide, so that’s the development fee. The customer facing piece we are seeing lots and lots of interest as people look at this as an alternative to offshore or BPO, because you can do it in the cloud you can determine the geography that you want the workers in.

And so we have everything from people having us manage their – build small business, refine the data base around small businesses for them from multiple data sources to a end their data base. We have more state government opportunities and this of course is processing tax returns for people. And we’re also beginning to see other applications which is the sort of Transcreation capability where you are absolutely doing a reviews in multiple languages for people So it’s early days yet but and we had a team going in the financial sector, of the industrial sector and so far very, very positive and I think that’s going to turnout to be a real winner for us in the second half of ‘13 and ‘14.

Ben Rose – Battle Road Research

Okay, thanks very much.

Operator

Vincent Colicchio, your line is open.

Vincent Colicchio – Noble Financial Capital

Yes, Don why did the gross margins tick down sequentially those are a bit lower than I was expecting.

Don Muir

Yeah as I mentioned in my call segment mix along with some new customer startups brilliant packet after segment mix probably had the biggest impact if you see that the fact that sequentially versus Q3 for example the language segment was down, the GDT segment was up. So on a mix basis language carrying a higher gross margin that had an impact. And so you’re going to have a volume impact on language and a mix impact on the segments. That’s really the biggest, the biggest impact we had in is as we said we expect gross margins in 2013 to continue with upward trend is we’re up about 50 basis points year-over-year.

Vincent Colicchio – Noble Financial Capital

All right thanks, Don. And Rory you talked about Europe a little bit. Germany and few peers are solid and the rest of Europe some worries but not much difference from the past. What is your expectation for Europe in 2013 and your growth outlook and how’s it compared to with you assume for 2012?

Rory Cowan

I’d share with all of you on one of my talk to all of you during late Q3, early Q4 that Europe there is some hesitation in Europe and I think that that’s I’m still cautious on your, remember we do focus on the export companies. So the European exporters are still doing, are pretty well for us. Am I concerned about Europe no more than I was last year. Am I dancing on the tables like Europe, absolutely not and I think that a thinking man should be cautious about Europe all throughout this year.

Vincent Colicchio – Noble Financial Capital

Okay. And Rory has there been any competitive response to the success you had in the GMO side?

Rory Cowan

Well as I mentioned I think some of the players that we’re seeing now are because what’s happening with as people move from traditional mass media marketing to digital marketing. In digital marketing, campaign execution is more of a technology and process-based goal than it was during the old mass market days. So, you’re seeing some of the agencies trying to keep these to get these bundled, the campaign creative and campaign execution.

Our goal is to say keep your agencies doing the creative and we’ll give you kick-ass execution globally, all right. That’s really what we’re seeing. So, now as I mentioned earlier, you were seeing some of the Indian offshore guys coming together, some of the agencies are trying to develop a joint venture response. We’ll see how that works. We’ve just heard this industry, we haven’t really bumped into it yet or had a face-off with them. So, I’m feeling pretty good about 2013, or election know about 2014.

Vincent Colicchio – Noble Financial Capital

Okay. Thanks, guys.

Don Muir

Okay.

Operator

Kevin Liu. Your line is open.

Kevin Liu – B. Riley

Hey, good morning. Just looking at your Q1 guidance seems a little bit below the growth rate that you have planned for the year. So, just wanted to touch based on what drives that and why and what sort of visibility you have into accelerating growth over the remaining quarters?

Don Muir

Yeah. Hi, Kevin, this is Don. I guess from a seasonality standpoint typically Q1 is slowest quarter out of the blocks sequentially. We see maybe a up slightly type of a quarter historically. So, I think as Rory alluded to, we’re seeing some good signs initially here in Q1 and our guidance reflects that $115 million to $118 million, which we think is pretty solid. And our full year expectation is $6 million to $10 million. So, that hasn’t changed.

Rory Cowan

And I think, Kevin, as I mentioned during Q3 and Q4, bookings in the prior quarter really determined wreck in the coming quarter. And so, we just decided to have a little bit of softness, softness not a strong conservatism on the top end of the range I think. All of our systems forecasting point to a strong revenue quarter in Q1 but there is no reason to try and ring the bell right now.

Kevin Liu – B. Riley

Got it, and with respect to the start up cost you saw in Q4, I mean which characterize those as unusual relative to what you typically see in a quarter and then what sort of expectations do you have on those startup expenses here in Q1?

Rory Cowan

We have had some significant programs start up in the TET testing segment we’ve a large program with one of our larger customers going on there, so that will get better as we go forward but I think the segment mix will correct over time.

Don Muir

And those start up expenses that required expansion in our Boise, Idaho location and our Warsaw, Poland location and even some expansion in Beijing for one very large program it’s ramping nicely so there was a lot of the start up expense.

Kevin Liu – B. Riley

Thanks, and last one on GMO you guys doubled revenues last year, what sort of expectations do you have on the growth side this year of the 20 plus customers that you have how many of those are actually with your top 10 or top 20 customers?

Rory Cowan

Yeah, it should be I think we’re looking at about another sort of 10 million on top of it so about 50% growth rate if you land one or two big ones and get maybe or sooner it may go little bit higher but there is firm demand for this across a lot of accounts.

Kevin Liu – B. Riley

All right. Thank you.

Operator

(Operator Instructions).

Sara Buda

Okay everybody, well if anybody has any question this is Sara Buda please feel free to reach out to me. We’re happy to answer them as they come in. Thanks everybody for attending.

Rory Cowan

Thanks very much. Bye.

Operator

This does conclude today’s conference. Thank you for your participation. You may disconnect your lines at this time.

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