Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Lionbridge Technologies, Inc. (NASDAQ:LIOX)

Q4 2008 Earnings Call

February 11, 2009 09:00 AM ET

Executives

Sara Buda - Vice President Investor Relations

Rory J. Cowan - Chairman, President and Chief Executive Officer

Donald Muir - Chief Financial Officer

Analysts

Richard Baldry - Canaccord Adams

Brian Kinstlinger - Sidoti & Company

Sachin Jain - Jefferies & Co.

Operator

Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions). Also this call is being recorded. If you have any objections you may disconnect at this time.

I'd now like to turn your meeting over to Miss Sara Buda, Vice President, Investor Relations. You may begin.

Sara Buda

Thank you and welcome everybody to the Lionbridge investor call to discuss financial results for the fourth quarter and fiscal year 2008.

During this call we may make certain statements that maybe considered forward-looking statements under Federal Securities Laws, and which involves risks and uncertainties. Our actual future results may differ significantly from the matters discussed in any forward-looking statements. We have disclosed in greater detail in our Form-10-K and in subsequent filings the factors that may cause such differences.

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

Rory J. Cowan

Thank you, Sara and good morning everyone. And we're delighted to have you here with us today as we review our positive Q4 and our year-end results. As you can see despite the global economic situation, we delivered the most positive Q4 in over three years; gross margins over 34%, $3 million sequential increase in income from operations and record cash flows. And we delivered the highest full year adjusted earnings since we acquired BGS. So I think that's a bit of a victory for all us here.

I think these positive results reflect to what we're beginning to see as a resilience of our business model. As I've said before, the world isn't going to start speaking English just because the economy is bad. We are one of those services that is required, whether someone sells one copy or million copies in a particular country.

In addition, I think you'll see we're now benefiting from our stock hold and disciplined and continuous costs management and currency management. As a result, margins have returned to the 34% level, operating income is growing and we are generating record cash flows.

We are in solid position as we begin, as we enter 2009. As you saw from our recent release we have a healthy pipeline of new business. We have recurring client relationships with some of the most respected organizations in the world, and I think that focus is very, very important. And so, we're beginning to see the strength and the acceleration we are doing with our receivables and other sort of financial metrics.

We're managing our costs. We have a currency tailwind and we are in a very favorable liquidity position as you've seen from our cash flow and our cash positioned at the year end. So, with these business fundamentals, we expect to deliver earnings growth in 2009 and beyond.

First provide some detail on the quarter and the year. So first let's talk about the quarter. We delivered revenue about $105 million. This is a solid result in the face of the global economic downturn and a weaker U.S. dollar, both of which of course negatively impacted our sales growth during the quarter.

Our pipeline of business continues to be quite strong. As I said, for our clients language is a business necessity. We don't necessarily worry about if a client will spend with us. It's really a question of when, then we'll talk about how customers are managing their spend with us. And I'll give you some more details in a moment on that.

Second, we've been actively managing both cost and currency. Don will give you few more details on that in a minute. But our gross margin in Q4 was 34.3%, an increase of 270 basis points from last year's Q4 and a sequential increase of more than 300 basis points from Q3. We've also increased our operating income by about $3 million from last quarter and by almost $6 million from last year's Q4.

As you know, we got a head start on the cost issue early given that we have these currency headwinds in the beginning of the year. And so by taking this thoughtful approach to cost, our client relationship remained in good stead as they see continuity and reliability from their delivery teams.

As a result as we left the year, we ended up... we trimmed about 7% of what I would call our high cost worked force while retaining these customers and maintaining extremely high service levels.

And finally, our liquidity position is stronger than ever. We had another record quarter of cash flow from operations, about $13 million in Q4 alone. We ended the year with about 38 million in cash, the highest cash balance in over three years, and we have reduced our net debt to under 18 million. So all in all, Q4 was a very solid quarter.

As you saw, we did have a goodwill write-down in the quarter. I'll let Don detail that for you. But as you know this is a onetime non-cash charge that has no impact on our business. We're joining a long list of companies that are reporting write-downs this quarter given the global economic downturn. And it seems that everyone we'd talk to our analysts and investors are largely ignoring these charges and are rather evaluating the business performances on the effect, excluding the effects of these write-downs.

So as we talk about the quarter and the year, our discussion will focus on our financial results excluding this onetime non-cash charge that we will all be clear on the underlying performance of the business.

So let's talk about the results for the year. For the full year, revenue 2008 was about 461 million, marking growth of about 2% year-on-year. Currency helped our revenue in the first half of the year, and of course dampened in our revenue in the second half of the year as the dollar strengthened. So I don't know what normal is anymore because we got help in the beginning and we got hurt in the second half. So what's the benchmark? Currencies are more volatile other than they have ever been.

In 2008, we reduced our operating expenses by about $3.5 million during the year in constant currency. And this reflects this ongoing cost focus.

From a profitability perspective, 2008 was also a very strong year. We grew earnings by about $4 million year-on-year or about $0.06 a share, a 9.4 million of revenue growth. Now if you exclude the impact of currency, and this is just abstract math of course, we grew our earnings about 13% year-on-year almost twice the face amount.

So for the year, we delivered about $30 million of cash flow from operations. We brought back 4.3 million of our stock. We paid down 16 million in debt, a solid front, a solid year on all fronts.

Despite this currency volatility and this global recession, our business is stable. Customer relationships are solid despite some delays through large customers. We have a solid pipeline of new business, margins are improving, profits are returning, and we're generating cash flows.

So, that was a good quarter. So that was then, this is now. Let's talk about what we're seeing going forward, because I'm certain as we go into the year that's a large part of our everyone's interest.

And I said we're relatively fortunate. Our business centers on a fundamental business requirement for all global companies, making certain products worth in local language. Most companies have scaled as you know derived about half their business outside of the U.S. so they can delay or they can trim this linguistic activity, but they have to spend a core amount with us to really be able to achieve success in international markets.

We are not unit dependant. So customers sell one product or million products in the given country, they still have to localize, still have to ensure that the product is engineered appropriately for that market. So language is pervasive, and so all of our end markets have to spend with us and this is a fundamental advantage of our business in any economy.

So what we said, we're in the midst of an unprecedented global economic recession. But right now, I think we are seeing two trends that we're finding quite heartening in our business: first, new large outsourcing programs. As you saw in our recent announcement most of these recent wins came from companies who had previously used in-house resources or smaller agencies or smaller organizations.

As clients seek to reduce internal costs that are outsourcing more and it seemed as if we are benefiting. People that have bought software, beef up the Red House operations are finding in fact in a downturn but less competitive than they thought they were.

We're also seeing what we might call as slight quality. Clearly, some of our smaller competitors are struggling the downturn. I'm getting lots of imbalance from smaller players to ask for close partnerships, close growths and even some of our smaller suppliers are having very real financial challenges. And so customers are now turning to Lionbridge as they seek a reliable, financially stable provider to address their critical business needs.

So these trends seem to be in our favor. At the same time, all companies are experiencing some cost management activity from a few of our larger customers. I'll mention what that... how that's evidencing itself in a minute.

Certain customers have delayed projects, resulting in some revenue softness as we saw in Q4 and Q1, which of course are traditionally are softer quarters in the year. But at this point, we are not seeing any cancellation of projects. Deals are still coming in, statements of work are still coming in, but that customers can delay. But they have to spend with us to get the revenue from their international markets. So, for the example, one of our largest clients was slated to have a start on a $2 million program during this timeframe. Instead of giving us one large project, they have decided to move this into a monthly program of about 2 to $300,000 a month.

While this clearly softens our Q4 and Q1 as we've seen and the long-term, it actually helps us with a smoother, more recurring revenue model which allows us to balance our costs and to create a much more cost effective model.

So on balance I think our revenue will be what it will be, but what we're feeling actually a more positive than most CEOs that I talk with it. It's an uncertain market for everyone, but here is what we do know: customers have to spend with us to get their international revenue. We are not unit dependent. We closed a number of large new opportunities in Q4 that will begin to ramp in Q2 and through the second half of the year. And we're gaining share from our smaller competitors. All of this should dampen any impact of what we don't know in the total affect of the global economic meltdown.

I mean, Sara has told me not to quote down Rumsfeld here, but if the... we don't know what we don't know. But I think that we are insulated from a fair amount of that.

So, let's talk about our two priorities for 2009. Continued cost management and accelerate our technology to transform the business. These two priorities will enable us to optimize business regardless of the revenue environment.

So, let's talk about cost. As I mentioned, we got ahead of the cost issue early and our cost management now is just a part of the culture here at Lionbridge. It started with the integration of BGS and Lionbridge two and half to three years ago and continued throughout this year. As the global economy has worsened, we've accelerated our cost management to stay ahead of the curve.

In 2009, we're going to continue to focus on three areas of cost management: first, continued head count reduction. As I said in the second half of 2008, we trimmed our workforce in the high cost areas like the Europe and the U.S. In 2009, we'll continue to adapt their workforce to meet current client demands, which will likely result in another 4 or 5% of head count reductions in these geographies.

Second with translator management. We're using our strong balance sheet and our extremely sophisticated technology to negotiate far more favorable rates with our partners in exchange for faster payment. A lot of translators, a lot of small agencies clearly are financially stressed and our ability to pay them sooner is giving us great, great leverage. And this, of course, shows sooner gross margin and our cost of sales.

Our third area of focus is of course fixed expense reduction. Last year, we closed one European location altogether and significantly reduced our footprint in another. We'll continue our fixed expense management in 2009, reducing leases and overhead expense wherever possible.

As a result of these and other cost initiatives, we improved our gross margins and decreased our operating expenses significantly in Q4. And I think we'll work towards maintaining these levels, these lower expense levels, maybe even beat them a little bit in 2009 by managing head count, reducing translation costs and minimizing fixed expenses. So that's our first priority cost management as you might expect.

Let's talk about our second priority technology. I think we're the only the company that really combines advanced web architected language technology with global mobile workforce management skills. As a result, we're successfully delivering on our strategy of diversifying our revenue streams across multiple end markets and across a various variety of service offerings.

For example, we've clearly built on our core language management skills to expand our global search relevance testing capability which of course falls into or presents in our GDT business in segment reporting. So the skills we have in the translation business, we're applying to the search relevance business.

In addition, we have proven the scalability of our technology this year. In 2008, we had more than 16,000 global users access a single platform when and since occurred worldwide managing global data, 16,000 global users.

We have the world's largest data base of linguistic assets in one hosted secure central platform. In 2008, we also enhanced the architecture... the grid architecture of this platform to really ensure that we have unlimited scalability going forward. This technology is giving us a clear, competitive advantage. Many of our large clients have chosen now Lionbridge as their sole provider, largely because this technology enables them to get their products to market faster, more efficiently with higher quality than any other platform in the industry.

So this Lionbridge Technology platform is also allowing us to pursue new business models, including the potential of opening this platform on a subscription basis to all customers and other partners. In doing so, Lionbridge will quickly become the technology services provider choice for customers and partners worldwide.

So, in summary before I turn it over to Don, Q4 was a good quarter for us in light of economic meltdown. We want to a lumber a number of large new client programs during the quarter. We increased gross margins 270 basis points year-on-year. We grew operating income by $5 million year-on-year. Generated record cash flows, paid downs some debt, and it was record cash on the balance sheet.

So now I'll turn it over to Don, so he can brag a little bit the financial management during this past quarter.

Donald Muir

Hello everyone. This marks my first full year here at Lionbridge, needless to say it had been busy and exciting. We achieved some success to 2008, particularly in three areas of reducing income taxes, accelerating cash flow and managing currency, which coincide with the areas that Rory asked me to focus on in 2008.

So our financial achievements for the year included reducing our income tax expenses by over $4 million or approximately 90% year-on-year and positioning the company for long-term tax rate of under 25%.

Lowering our DSOs by six days year-on-year, marking significant improvements in working capital, generating 30 million in cash flow from operations, paying down $16 million of debt, buying back $4.3 million of our stock in 2008 and over the past 15 months, we brought back approximately 4.7 million shares, almost 10% of our total company. Growing our cash balance to $38 million and we began to minimize our currency exposure by reducing our euro denominated inter-company balances towards the end of the year. All in all I think it was a very successful year, particularly in light of the global economic recession that we already mentioned.

Now let me get into the details of the quarter and the year, before outlining my key priorities for 2009. For the fourth quarter, we generated revenue of 104.6 million. This is a decrease of 12.6 million year-over-year largely due to currency and the global economic slowdown. That said, even our lower revenue, our quarterly profits increased year-on-year and sequentially.

Gross margin for Q4 was 34.3%, an increase of 270 basis points on last year and an increase of over 300 basis points sequentially from Q3. Margins improved in all segments in the fourth quarter. This reflects positive work mix, diligent cost reduction, and more favorable currency.

Margin at our GLC language business was 33.5% for the quarter, which is 230 basis points higher than last year's fourth quarter and a sequential increase of more then 300 basis points compared to Q3.

Fourth quarter margins in our GDT business were 39%, the highest in over three years. We also significantly reduced our operating expenses. In fact, in Q4 we reduced our operating expenses by $5 million year-over-year, excluding restructuring.

As a result income from operations in the fourth quarter improved almost $5 million year-over-year and increased $3 million sequentially from last quarter despite the lower revenue. This reflects the benefits of our cost management and improving currency environment.

As a reminder for those of you who are new to Lionbridge, about 50% of our revenue is in non-U.S. dollars, but more than 70% of our costs are non-USD. So the recent strength in the dollar had a negatively impact on revenue, but helped us improve profits by reducing expenses. This is exactly what we saw in fourth quarter. Our other expense lines are essentially flat year-over-year at just under $1 million.

For the quarter, we had a tax benefit of $368,000. However, this includes a tax benefit of $1.6 million related to the goodwill impairment charge. Excluding this impact, our tax provision was 1.2 million for Q4, reflecting some year-end through-ups.

On a GAAP basis, we had a loss for the quarter of $119 million or $2.14 per share. This includes the impact of a non-cash goodwill impairment charge of 120.6 million and the related tax benefit of 1.6 million. I will get into the details of the goodwill impairment charge shortly.

In the meantime as Rory mentioned, I think it is appropriate for us to detail the underlying performance of the business excluding this onetime charge. Excluding this non-cash charge, our Q4 EPS was breakeven. This is an improvement of $0.07 from last year's Q4 despite the lower revenue as a result of increasing gross margins and reduced operating expenses.

You saw in our earnings press release issued earlier today that our Q4 and year-end net income is preliminary. Our successful tax planning triggered a 2008 profit in the U.S., which allows us to start using some of our NOLs.

While our internal review indicates that we are fine, we still have to complete a formal analysis of the utilization of our NOL carry forwards under Section 382 of the IRS code to support our tax provision. We don't thoroughly expect any significant changes to GAAP net income as a result of our final analysis, and this exercise will be completed by the time we file our 10-K.

Now back to the quarter. Our cash liquidity position remains strong. We generated more then 13 million in cash flow from operations in Q4. We paid down another $2 million of debt in the quarter. Our ending cash balance was 38 million, certainly a record since I've been here. Our net debt is now under 18 million. So, I'm very pleased by our ability to generate cash in such a challenging economic environment.

For 2008, we delivered annul revenue of $461 million, an increase of about 2% year-over-year. In constant currency, revenue was down about 1% due to the global economic recession. From a segment standpoint, GLC language business was most affected by both currency and the global economic recession. GLC revenue declined by about 2.5% year-over-year.

Our GDT development and testing segment grew steadily in 2008, an increase of about 18% year-over-year. Growth in GDT was largely driven by the continued strength of our multilingual search relevance business. As a reminder our search relevance capability focuses on testing and improving search engine results in global markets. We assume growing demand for this service as internet usage grows and as companies increase this spending on targeted online marketing.

Like our GLC business, search relevance uses a global mobile at-home contract workforce, but for segment reporting purposes this offering is included in GDT. So, this rapidly growing search relevance capability helps our GDT segment for both revenue and margins.

Looking at operating expenses for 2008, we reduced SG&A expenses by 2 million year-on-year in constant currency. As Rory said, we got ahead of cost issue early by focusing on head count reduction, fixed expense management and by reducing our translation costs. I think the teams have done a good job in managing costs and I'm pleased with the progress we've made so far. These cost actions combined with a more favorable currency environment indicate continued profit improvement for 2009 even at lower revenue.

From the year, our tax benefit was approximately $1 million. However, this includes the tax benefit of 1.6 million related to the goodwill impairment charge. Excluding this impact, our tax provision was about 600k for the year, a reduction of 4.4 million year-over-year. For the year we had slight loss of about $315,000 excluding the goodwill write-down charge. This marks significant earnings drop of about $0.07 per share year-over-year.

Now let's talk about the balance sheet which remained solid. I am very pleased with our liquidity position. For the year we grow $30 million in cash flow from operations as we continued to successfully focus on working capital management.

We've paid down $16 million in debt during the year and we also bought back 4.3 million as a stock in 2008. So we had another very strong quarter and year from a cash flow standpoint. Our DSOs are down to 55 days, a reduction of seven days in 2007.

As Rory pointed out we are fortunate. We provide a service that our clients rely on for international revenue. Even in a bad economy our clients pay on time. So our low DSOs reflect three key elements of our business: one, the high caliber of our client base; two, the underlying importance of the services we deliver; and three, the remarkable quality of our global delivery teams.

In 2008, once again we wrote-off less than $200,000 in bad debt by more then 460 million in revenue. So, our high quality client base continues to service well.

One final note on the balance sheet, as mentioned in our earnings press release issued earlier today, we booked a non-cash goodwill impairment charge to $120.6 million during the quarter, reflecting the write-down of all of the goodwill in our GLC segment.

This goodwill is primarily associated with our 2005 acquisition of Bowne Global Services. This write-down reflects the result of our annual FAS 142 impairment testing of our long lived assets, which ensured requires companies to adjust impaired assets to their fair values as of the test date 04/12/31 '08 in our case.

As you are aware the market values of many public companies including Lionbridge have declined during fiscal 2008, which largely precipitated the timing of goodwill write-downs at the end of the year.

In summary, our fourth quarter and full year 2008 results remained positive, particularly in light of the global economic slowdown. Margins and profits are beginning to improve. We are managing cost and we continued to generate cash.

As you look ahead to 2009, I'll be focused on further reducing our currency exposure and maximizing our cash. Regarding currency, based on where we are today, we are assuming the dollar is going to stay in the 125 to 130 range versus the euro. This would have a favorable impact on our cost structure as compared to last year. So even net too tailwind for operating profitability as we head into 2009.

That said, we still want to move this business to become more currency neutral long-term by focusing on a our few goals: one, increasing our use of technology to increase efficiency. As Rory says we need to move our business into the cloud. Two, reduce our overhead cost particularly in Europe and three, continued to reduce foreign currency into company exposures.

Currency will always have some effect in our business given the nature of our activities. But by focusing on technology, reducing overhead costs and reducing inter-company balances, I think we can further optimize that business regardless of currency.

In terms of cash, I feel that we are in a very solid position. In 2009, we'll continue to manage our working capital aggressively. We expect to generate cash for the full year of '09.

Typically, we consume cash in Q1 and then improve our following cash flows throughout the year depending upon our revenue levels.

So, in summary we are managing costs, our profitability is benefiting from an improved currency environment and cash flow remained strong.

For Q1, we expect revenues between 93 and $102 million, and we expect first quarter operating expense levels to remain track to down from Q4. For 2009, given the state of the global economic recession, I don't think it's prudent to give any point forecast for the year. However, I think it is safe to say that we expect revenue to be flat to up in constant currency for the full year. We expect to improve operating profit as a result of our ongoing cost management and favorable currency environment, and we expect to generate cash.

I am pleased with the business on all fronts. We are withstanding the global economic downturn. We are managing our costs. Our margins and profits are improving. And on top of that, we have a terrific team, top-notch customers, and a resilient business opportunity. I look forward to the year.

Now Rory back to you.

Rory J. Cowan

Thanks Don. So, I guess just quickly in summary here. I think that this has been a fairly sort of comprehensive layout of the quarter and the year. But I do... on this quarter we do have a resilient business model. The world is just not going to start... the world is not going to start speaking English just because the economy is soft.

I think we're delivering on the long-term strategy of diversifying our revenue streams. As Don mentioned, we've taken skills from our language business and we're really beginning to grow our GDT segment as you'll see in the final reports with worldwide search relevant services.

We have seen some new large opportunities in our pipeline as customers truly understand that this is known that our capabilities are non-core to their areas, and so we're beginning to see interest in outsourcing the entire language process to one provider rather than just outsourcing individual translation opportunities.

Third, we're clearly managing our costs and we're going to continue to manage our costs. I think that now we have the stability, but we'll manage it in the same thoughtful way that we did last year which has really given us the confidence we have with our customer set.

Our technology has given us a competitive edge and a long-term advantage. That's enabling us to retain customers and manage costs, and lastly we do expect to increase profits in 2009.

So now I'll see if there are any questions.

Question-and-Answer Session

Operator

(Operator Instructions). And we do have our first question from Richard Baldry from Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks. Could you give us a line item on stock comp in the quarter and then maybe talk about your pipeline of deals? Obviously the 25 to 30 million in annualized contracts you announced recently was pretty strong. So I'm curious about how that pipeline look going forward, whether you expect to be able to make sort of incremental announcements as the year unfolds ahead? Thanks.

Rory Cowan

Great, thanks. What I'll do, Rich, is I'll start with the pipeline discussion while they shuffle the papers here and find the stats.

Donald Muir

Q4 is 1.1 million Rich.

Richard Baldry - Canaccord Adams

Thanks.

Rory Cowan

Our pipeline in the quarter, as I mentioned Rich what we're seeing is that... we're of course a worldwide sales force and you've probably seen all those charts that you begin to look at. All the charts are looking in the green zone. So what we are finding is those people are committing to us and as I mentioned there is some spend management. So people instead of giving us one projects, they are stringing it out throughout the year. That's a negative although we are seeing is that there is just again a spend management process.

Do we expect to have some other significant wins coming through out the year? I think so. There is a very different nature. There is a maturity in our customer base now of looking at the language process in a more holistic way rather than trying to break it up among five or six or seven individual suppliers. That's a very different sales process, and it's a very different response of process. But, of course, it's a much more advantageous to us.

So we're seeing a firmness which is quite honestly surprising to me that we have this amount of deal increase going on in the pipeline right now.

Richard Baldry - Canaccord Adams

Then maybe could you talk about directionally if not a magnitude where you'd expect cash flows for '09 versus '08? Thanks.

Donald Muir

While as we said we're trying to stay away from many point guidance for '09. Certainly '08 was a very successful year in terms of managing our working capital and we generated about 30 million in operating cash flow. So that's a tough act to follow. But as we said in the call, we do expect to be generating cash in '09.

Richard Baldry - Canaccord Adams

Thanks.

Operator

Thank you. Our next question comes from Brian Kinstlinger with Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

Great thanks. And the first question I had on the write-down, does that not impact any of your debt covenants?

Rory Cowan

No.

Donald Muir

No.

Brian Kinstlinger - Sidoti & Company

Great. Did you gave the... I heard the annual GLC and GDT revenue increases and decreases. Could you give the quarter and what the margins were for the quarter?

Rory Cowan

Yeah, GLCs this quarter was about 76 million which is about 73% of the revenue. GDT was around 22,000 (ph) of interpretations.

Brian Kinstlinger - Sidoti & Company

And how did margins moving those divisions space with currency moving?

Donald Muir

I think, hang on coming up the screen here. Second we'll go to... here we go

Brian Kinstlinger - Sidoti & Company

Fourth quarter gross margin.

Donald Muir

Yeah. GLC, I think we said in the call, it was about 33.5 in the quarter. GDT was 39 with the churns up around 28.

Brian Kinstlinger - Sidoti & Company

Great. And I'm not looking for a point of guidance, but from my understanding you only got partial benefit from FX in this quarter as your contract roll month-to-month or quarter-to-quarter. So I guess I am curious on the lower revenues, should we expect that our operating profit in the first quarter compared to the fourth quarter or should we expect more near term and more visibility, so I'm curious just directionally which way are we moving?

Rory Cowan

Yeah, I think it comes in Rich, first as we I mean... sorry, Brian.

Brian Kinstlinger - Sidoti & Company

No problem.

Rory Cowan

First, Q1 as we have mentioned before you really don't know what the quarter look likes. It's the only quarter we have is March really drives us last month drives the quarter because budgets are never released until the first two or three weeks of the quarter. So it's a little bit more difficult to forecast. That's why we are a little hesitant on things. And also we just given the spend management issues that I talked about earlier, I think we're little hesitant to give any sort of point forecast. But Don what's your sense, may be a little bit?

Donald Muir

Yeah. I think that as we said the range revenue that we are providing here, kind of 93 or 102, that balance sequentially obviously from the fourth quarter. So we're going to have some volume pressure there Brian. But all that being said, our costs expectation is kind of flat sequentially. So, we'd expect the gross margin should be somewhat similar than what you saw in the fourth quarter.

Brian Kinstlinger - Sidoti & Company

Okay. And then my only question is why would costs be flat? I mean I've heard from you guys kind of couple of occasions that you only got partial benefits from currency in December and you'll get more in March. And then I'm also curious, I mean I guess the head count reductions weren't fully realized in December. So tell me why, I'm sure I'm missing a piece, but why costs are going to be down in March compared to December?

Donald Muir

The currency still goes bounce around a little bit and euro did strengthen the beginning part of the year. So we have some of that affect going in the month of January.

Brian Kinstlinger - Sidoti & Company

Okay.

Rory Cowan

The volatility within the quarter, I mean, directionally you're right. We want to be nailed down anything or another happening those middle of the quarter, it is such an uncertain time right now I think that would be inappropriate for us to make any greater commitments.

Brian Kinstlinger - Sidoti & Company

And when you cut 7% of the workforce, what does that translate into in savings? Do you have a rough estimate of that?

Rory Cowan

It's and the millions. We have been looking because they are all across the entire portfolio of countries. Well I guess between... what is it, couple of million bucks probably, we said in constant currency, say about 3.5 million. So some of that at leased but most of that is wage.

Brian Kinstlinger - Sidoti & Company

Okay. And as most of those people was that in the fourth quarter or is that throughout the year?

Rory Cowan

I think throughout the year. But remember with Europe when you sort of go through the process with work councils and another things, you can make the announcement, and it's really eight to 12 weeks before you see the annualized benefit of the savings. So it was back-half loaded.

Brian Kinstlinger - Sidoti & Company

Okay. And what is your worldwide head count and if you prefer it, was it by high cost more assets line but it's not a total head count, would you --

Rory Cowan

Yeah worldwide head count is by 4500, somewhere in that range.

Brian Kinstlinger - Sidoti & Company

Okay.

Rory Cowan

All right, and most of our are in about 2,000 of those are in what we call lower cost areas. So we got about 2,500 people in the U.S., China and in the U.S., Europe and Japan.

Brian Kinstlinger - Sidoti & Company

And I take it that 2,000 was... is higher than before was the remainders of the high cost guys are lower than before based on what you said?

Rory Cowan

Well that's right. Because also remember some of our low cost areas are times and materials people because of some the GDT business has a time and materials group. So that's... and when we cut some people out of Europe, we have shifted some of that activity to lower cost areas as well.

So it's a bit of a blend. Remember our GLT business is largely unit based and its revenue orientation. Half of our GDT business is timely materials and half of that GDT that is also unit base, so it's very hard to do the metric, but traditional services business we look forward which is revenue per FTE.

Brian Kinstlinger - Sidoti & Company

Okay. And how many, I think how you've been handling the lease the leases in closing of office as they expire I think you winded down I think. But I'm curious about the case how many leases you have in locations that are expiring in 2009 that might be an option?

Rory Cowan

Well we do have, you are absolutely right. Our process has been is to look at places where we have leases rolling over and are there significantly shrink the office or use as an opportunity to put everything in to the cloud and offshore. I think that we have a lot of breakpoints in leases. Don and I are going through this, is it in low single-digits, probably in somewhere that might be a number that you might want to think about.

Brian Kinstlinger - Sidoti & Company

And that's throughout the year, that's not back is that front-end loaded or back-end loaded or anything like that?

Rory Cowan

I don't have that. I think it's pretty much throughout the year, because we've got like 50 offices around the world now. So --

Brian Kinstlinger - Sidoti & Company

Okay. And Don, on the other expense line you had that I think it was 949 or 969 other expense. What was that?

Donald Muir

Primarily in a company... revalue all currency impact.

Brian Kinstlinger - Sidoti & Company

Now that was generally places you had lost when currency was hurting you. Now currency was helping you why --

Donald Muir

Well, we still have currencies like the yen, which go in the different direction as euro during the fourth quarter.

Brian Kinstlinger - Sidoti & Company

Which doesn't offset gains in other areas?

Donald Muir

No, it didn't. So we still have some of that. We are working to mitigate that as we go forward. As I said, we are actually reducing our yen exposure as we speak to you in Q1. So --

Brian Kinstlinger - Sidoti & Company

And so then how should I think about other expenses this year, should I just be thinking of it, I mean --

Donald Muir

I think you want to pretty much use the run rate that you've seen historically is prior half a million plus or minus couple of hundred thousand.

Brian Kinstlinger - Sidoti & Company

And you've mentioned taxes of 25%. Suppose you are profitable in 2009, is that the tax rate that you are expecting now?

Donald Muir

Yeah, that's about where we are heading long-term. Obviously it's going to depend upon profitability. If you look at our tax provision last year, extra goodwill charge and extra big benefit that we took for an Irish tax situation that we managed successfully during the third quarter. We had about $2.5 million tax provision for the year. So that's kind of a good indication by dollar perspective.

And then as we improve profitability, that as a percentage of your pre-tax income will get to close to 25%, if not in '09 certainly in the future when we have higher levels of profitability. But based in the fact that we have zero tax rate given our NOLs essentially in the U.S. and the foreign tax rate is being managed effectively with our new transfer pricing methodology, mid-20 is very achievable, if not in '09, next couple of years.

Brian Kinstlinger - Sidoti & Company

Great. And in January you put another press release talking about the new business wins and you actually put 25 to $30 million in expectations in revenue. Is that still hold, you are talking delays, is it possible some of that gets pushed back up a little bit, what's the thinking on those new programs nonetheless?

Rory Cowan

Specific contracts are the majority of them we're not seeing any delays. If you go down that list, some of the smaller one as always happens the smaller companies are little bit more cautious, large companies commit to programs and generally follow through on them.

Brian Kinstlinger - Sidoti & Company

So, has there been start dates for a lot of the bigger ones already, they already started or not yet?

Rory Cowan

Absolutely. There are lot of pre... if you are going to transfer $10 million program, for example, there is a lot of planning that goes into this, a lot of kick off meetings around the globe. So those programs are well engaged.

Brian Kinstlinger - Sidoti & Company

And did that weighted towards GLC or GDT?

Rory Cowan

Let's see, it's probably a little above the facts of GLC and GDT. I think if I have to work through it, it's about 50-50 is what I'd say.

Brian Kinstlinger - Sidoti & Company

Okay, in terms of the cash that you I mean is your expectation you'll be starting to pay down debt or will prostrate now so I mean what are your plans now that you are building to load at deficit?

Donald Muir

I think given the current global economic environment, will there be somewhat clashes here in terms of our cash management opportunities, but paying down debt is certainly at the very top of the list in terms of using excess cash.

Brian Kinstlinger - Sidoti & Company

Okay.

Rory Cowan

Reality is liquidity in this market. No one needs, I mean you're in the business, you see what bank lines cost here and what liquidity is and workforce that we're generating cash and we have a wonderful relationship with our banks. And I just want to keep it that way.

Brian Kinstlinger - Sidoti & Company

Okay. The last question I have is greater pricing. On one hand, every customer of every company wants lower prices, on the other hand it sounds like your competitors are having big troubles right now. So, just give us a sense of how old, what all that means and right now and what you're seeing on pricing?

Rory Cowan

I think it varies according to end market. I think that some of our life sciences activities, that's the business where saving a couple penny is a word and having a better translation could have life or death consequences. So we're not seeing as much price orientation there.

At the smaller technology and software companies that are beginning to struggle, we are seeing some very real price sensitivity. And these are the groups that are saying let's just get out of the business altogether rather than just work on a price per word. So it really depends upon end market and the size of company within the end market.

Brian Kinstlinger - Sidoti & Company

Thank you.

Operator

Thank you. Our next question comes from the line of Sachin Jain with Jefferies.

Sachin Jain - Jefferies & Co.

You recently announced about 70 to 90 million of new business wins. Can you just compare new business wins in calendar '08 with the last couple of years? How is the trend being here?

Rory Cowan

That's a very good question Sachin. First, I think that the reason we sent that out is that our Q4 new business was way above trend for any other Q4 that we've had since we put the two businesses together in three years. Is it 30% above, is it 40% above, something in that sort of scale. And also the nature of those wins as we mentioned were multiyear contracts, which was also something that was different for us. So is it 30 to 50% above the trend, that sort if range, but more importantly they were multiyear commitments.

Sachin Jain - Jefferies & Co.

That's helpful. And second, do you have... do your currency have any exposure to financially distressed clients, I mean like any meaningful exposure there?

Rory Cowan

No. And, in fact, that's one of the things that we're quite pleased, because you may recall last we bought BGS two or three years ago, we worked to focus on our top ten customers. And by doing so we are very financially strong and stable customers, very little financial services exposure by the way. And I think as an indication of that, Don mentioned that our DSOs are down quite dramatically worldwide to 57 days... 55 days, even better than I have remembered Don. 55 days. And we only wrote-off $200,000 last year worldwide are over 450 million in revenue. So, we focused on very high quality customers. And I think that's standing in a good state right now.

Sachin Jain - Jefferies & Co.

That's encouraging. Thanks for taking my question.

Rory Cowan

Great, thank you.

Operator

(Operator Instructions). Our next question comes from Richard Baldry with Canaccord Adams.

Richard Baldry - Canaccord Adams

Thanks for the follow-up. Just curious, on a dollar basis going forward where you see the step down to the acquisition related amortization that should fall pretty dramatically. So, do you have a preliminary idea on maybe I guess the useful life or amortization period for the remaining 30 million that's going to sit on the balance sheet? Thanks.

Donald Muir

Rich, we only rollout goodwill and we were not amortizing goodwill. As you my recall, the current rules changed a couple of years ago, we stopped amortizing goodwill. We do amortize intangibles, but we did not write-down any of our intangibles on our balance sheet as a result of this exercise.

Richard Baldry - Canaccord Adams

So will there be a step down next year for intangibles or a similar run rate?

Donald Muir

They may be a little bit. The run rate will come down a little bit. As they age, you're going to see some of them dropping off.

Richard Baldry - Canaccord Adams

It might go down couple of hundred thousand bucks year-on-year, that sort of. I think you're trying to get a model?

Donald Muir

It might be, sort of half million probably for the year.

Richard Baldry - Canaccord Adams

Okay, thanks.

Operator

Thank you. Our next question comes from Brian Kinstlinger with Sidoti & Co.

Brian Kinstlinger - Sidoti & Company

Well, that was quick. It was a follow-up and I'm not sure if I heard it exactly. I remember when you bought BGS, they had some automotive exposure. Can you tell us how much there is and while I remember being a lot of European maybe give us a sense of any news from GM quarter price bar?

Rory Cowan

Great, no but very good memory. We do still have automotive exposure and it's for a German automotive manufacturer. It's very small. They make very fast cars that we had all aspire to own one day.

Brian Kinstlinger - Sidoti & Company

Great.

Rory Cowan

So that's a very solid relationship with them. In fact, we put them on our technology and I think things are going very, very well in that area. And it's probably couple of millions bucks or something like that?

Donald Muir

Yeah, we also have a little bit with GM.

Rory Cowan

We have a little bit which I just said they are writing here little bit with GM under a million or two bucks, somewhere in that range.

Brian Kinstlinger - Sidoti & Company

Those fancy cars, those sales are down do you mind if they are?

Rory Cowan

Yeah, but you know what, those fancy cars if they sell one of them in China or if they sell a thousand of them they still have to mechanically speak Chinese.

Brian Kinstlinger - Sidoti & Company

So of the troubled ones, there is very slight portion of revenue and those are the only two customers in automotive?

Rory Cowan

I think that's about it, maybe we might have some more with Reno and some others in Europe that are somewhat similar. We've got some Volvo, that's right we've got some Volvo, which is fine. But again such small exposure for us and I know you're thinking if any of the big three go after chapter 11 that people like us get clobbered. We're managing that stuff very, very closely.

Brian Kinstlinger - Sidoti & Company

And then in terms of financial service, it might be low. There has been some consolidation in for those who are left standing. Do you have any exposure with them and then there is some uncertainty what's going to happen once an integration is complete?

Rory Cowan

No. And in fact we start pulling back from financial services about two years ago. When we decided to move into individuals segments, we really want to focus on few large segments. We are seeing some of the last men standing come back to us right now with some very significant opportunities again on this full outsourcing model. So, I think that rightly when we sort of looked at the customers we want to deal with, we chose the right group. And now the stronger financial services firms are beginning to come back to us and ask us to look at some larger projects. Again, we want to focus on multiyear deals with them not just individual projects.

Brian Kinstlinger - Sidoti & Company

Okay. Thank you.

Rory Cowan

Great, thanks Brian.

Operator

We have no further questions at this time.

Rory Cowan

Well, great everybody. Thanks you very much. And, of course, we're here if you want to talk anyone about further refining your models. Thank you very much.

Operator

This concludes today's conference. You may disconnect at this time. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Lionbridge Technologies Q4 2008 Earnings Call Transcript
This Transcript
All Transcripts