Lionbridge Technologies, Inc. (NASDAQ:LIOX)
Q3 2009 Earnings Call Transcript
November 5, 2009 9:00 am ET
Sara Buda - VP, IR and Corporate Development
Rory Cowan - Chairman and CEO
Donald Muir - CFO
Rich Baldry - First Albany
Kevin Lu [ph]
Joshua Horowitz [ph]
Sachin Jain [ph]
Bob Sail [ph]
Welcome, and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator instructions). Today's conference is being recorded, if you have any objections, you may disconnect at this time.
Now I'll turn the meeting over to Ms. Sara Buda, Vice President, Investor Relations. Ma’am, you may begin.
Great, thank you. Welcome, everybody, to the Lionbridge investor call to discuss financial results for the third quarter of 2009.
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 have disclosed in greater detail in our Form-10-K filed with the Securities and Exchange Commission on March 13, 2009, the factors that may cause such differences.
And now I’ll turn the call over to Lionbridge Chairman and CEO, Rory Cowan.
Okay, thanks Sara. Welcome everyone. As is our custom, today I will walk through the quarter at a high-level, provide some insight on our current sales pipeline and then wrap up with some perspective on 2010. Don will then provide some details on the quarter and our cost reduction efforts.
I assume that you all have the release in front of you, and you can see that it was a solid quarter. For the third quarter, revenue came in at about 98 million, and this was at the high-end of our guidance as you'll recall. And more importantly, we bucked our usual trend of a seasonal sales decline from Q2. So we're delighted to see that as we had suspected, the pipelines were firming and we see that revenue came in line with Q2, and that really suggest that things have stabilized after a challenging start to the year.
Compared to last year, however, revenue was still down of course by 14%. While that decline isn't as severe as it was during the first half of the year, the demand environment was still softer than last year. However as you see from our Q4 and our 2010 guidance, the pipeline continues to firm, it is quite solid, and we expect sales to accelerate in the coming quarters. And I will touch on how we will be driving that growth in a little while.
Operating income was about 2.2 million excluding restructuring. So on about 16 million is revenue, we actually increased our operating income by about $1 million. The shows the power of our cost actions that begin to come through. GS&A is down about 5 million from last year's Q3 on a – and that's about a $20 million cost reduction on an annual basis. And we continue to reduce our fixed expenses which is particularly important in this currency environment and Don will detail cost and currency actions shortly.
As we've shared with you, our goal is to try to transform our model over the coming years to be as currency neutral as possible, although we will never be currency neutral. Of course, that is how we're reallocating our expenses. On a GAAP basis, our loss was about $0.03 a share. Excluding restructuring, we were profitable for the quarter. We continue to generate solid cash flows with about another million dollars this quarter, and we paid down another 5 million in debt. So with an ending cash balance of about 24 million, this brings our net debt to under $8 million, again a record low.
So we continue to generate cash, manage our balance sheet and pay down debt. So I think it was a workmanlike quarter and revenues stabilized, Q4 looks even stronger. SG&A expenses are down by about $20 million on an annualized basis. Operating income has increased despite the year on year revenue decline and we continue to generate cash and paid down debt.
Now let me look at the current demand environment and share some of the drivers behind our positive Q4 revenue guidance and our early 2010 outlook. First, I mentioned in the release that our language business has one of the strongest pipelines in over seven quarters. The strengthening sales environment reflects a number of trends and as I have said to many of you before, the pipeline is very strong, but I want to see the convergence to make certain that in fact the firmness that we're seeing actually is real rather than just a shopping [ph] during the next two quarters.
First to new business, as companies turn around and they turn toward really their outsourcing of business, we saw this trend in the last downturn, and with market pressure, companies finally begin to look at new ways to cut costs. And as you know, with this recession, many companies were forced to cut costs by about 20% or even 30%. So even if the economy begins to strengthen, organizations are still looking for a much more nimble model to increase profits as they found the cost of this fixed expense in the downturn. So there is a new focus on reducing internal fixed expenses and shifting to variable cost models, and in this environment translation is one of the areas that finally is coming into the spotlight with their international focus.
To capitalize on this, our sales team in now opening new doors at large organizations that have burdensome internal operating overhead costs. For example, we're helping a consumer electronics company outsource their vast translation needs that had been managed in-house. With our advanced language technology and process expertise, this is where we shine, and our managed services models provided them a value-based approach of reducing their total attracted cost. As a result, we are winning some new large scale programs with new clients. So that is the first trend.
The second positive trend is really a consolidation of suppliers. Contrary to other industries, Lionbridge actually benefits from working directly with procurement organization at large companies. As the market leader and with our technology, we help companies realize the benefit of a more efficient centralized process for managing translation across their entire global enterprise. In one recent discussion, a large well known organization had more than a 140 suppliers for translation. That is right. A 140 individuals supplier for translation. This was a legacy of their many acquisitions over the years, and as the market leader, we helped them centralize processes, consolidate their supply base. And in doing so, we will save this client millions in duplicate costs, and this all this of course without buying internal software, because it makes no sense to trade one fixed expense for another. As a result of this move strategic approach to selling, we are able to negotiate larger deal sizes but longer-term and of course this is a win-win for everyone.
The third issue we're doing is we are diversifying our base. We have been making a few changes in our sales and operational structure to address specific needs of specific vertical markets. We now have a dedicated fully integrated global team for segments such as life sciences and this is beginning to show strength as some of our wins of last quarter were world renown biotech company, a European pharmaceutical company, and even a couple of wins in the automotive industry that is beginning to show life again. So these new programs really require deep domain expertise and an operational structure that supports the complex needs of regulated industries or global manufacturing, two very different delivery models.
So as we re-accelerate our sales efforts, we are putting dedicated teams in place to target specific end markets that offer untapped potential for growth. In addition, we are starting to invest more in sales and marketing. Nine months ago, nobody was buying, so there wasn't a lot of sense in investing in selling. Now people are beginning to buy again so it makes some sense to invest in selling. Few quarters ago it was about managing costs, it still remains a priority for us but today our focus is on driving growth.
So in sum our new business pipeline is strengthening, companies are outsourcing more, we're seeing a consolidation of suppliers, and we're diversifying our end markets. So as we look forward, many of you ask, what is the tone out there, because we sell to so many different and markets. It looks as if many large clients are slowly begin to spend again. After senior tightening early in the year, tech and consumer clients are preparing for new product releases before realizing that they don't have the products that they too will not get to grow. And of course when new products are released, that is when our business to strengthen.
So for the first time in several years, we are seeing new platforms fuel development of ancillary applications and products. So right now it seems that we will see a slow recovery among our top clients with the exception of a few segments like education, our GDT business which primarily impacts our GDT area. This is the for profit education world seems to be strong but the not-for-profit education segment doesn't seem to have recovered yet. But overall the environment feels far more positive than it did several quarters ago. So in this market, it is prudent to be cautiously optimistic. These trends give us added confidence for 2010.
So before I turn it over to Don, I want to touch on the role of our technology innovation. As you saw a few weeks ago, we announced the launch of our Translation Workspace software offering. This is based on our proven Logoport technology which has been in production internally for several years across thousands of users in well over 800 countries. We had expanded Logoport into a fully scalable, secure multi-tenant platform. That has really been the anchor of our R&D efforts for the past year or year and half is re-architecting that, so that it is secure and multi-tenant. So everyone who has subscribed will have their own private workspace.
So we launched this during Q1, the general availability would be Q1. We will sell Translation Workspace on a subscription basis to translators and agencies. So for translators, this is a very powerful platform with a basic per month subscription and an Internet connection. This will allow them to translate, collaborate, manage all the language production in real time and monitor productivity, while engaging qualified translation resources on demand from anywhere in the world. If you have an interest, I would go to www.geoworkz.com, and you'll see a flash video demonstration of the technology and we think it is quite compelling and the initial returns confirm our opinion.
For Lionbridge, this is an opportunity to expand our market leadership. In addition to providing the world's leading translation services, we will soon be providing the world's leading translation technology. This is an exciting evolution of the company that I now feel comfortable funding and I now feel comfortable putting a lot of energy going to market. This is also attractive for our clients and it gives us a clear differentiator in the market. Instead of requiring customers to pay for software licenses and deploy on premise software, we provide a whole fully hosted SaaS, or software as a service model, and it gives them access to the most advanced language technology available, and it is proven of course. So there is no differentiation between technology that is available to large world players as well as our local projects for local providers.
In doing so, we reduced cost and increased our flexibility and agility again exactly the model they're looking for in this environment. To be clear, we don't expect a huge amount of revenue next year from this technology. It is a SaaS, so subscriptions builds over time, but it generates a very solid and stable cash flow in this model while of course giving essentially financing to the end-users as they don't have to have any upfront spend to enjoy the benefits of the software.
It is based on our proven technology and the subscription revenue should generate some strong margins particularly as it gains traction in the industry as a standard productivity tool. So by opening Logoport technology and launching Translation Workspace in this innovative SaaS model, we are changing the dynamics of our industry and extending our market leadership. So as the world recovers, we think this is exactly the right time to be launching a product. So I guess revenues are firming, costs are falling, technology is coming to market, and we're paying down debt.
So now I will turn it over to Don and he can give you a little more detail on all of those trends.
Thanks Rory and hello everyone. Today I will provide a financial overview of the quarter and then I will give you an update on how we're managing of our key priorities, enhancing profitability, managing costs and generating cash. Q3 was a solid quarter. Revenues stabilized after a challenging start to the year. Operating income ex restructuring improved year on year despite a revenue decline. We generated positive cash flow and we continue to reduce our debt.
Now let's talk about some of the details behind these positive trends. Revenue for the quarter was $97.8 million. This is sequentially flat with Q2's top line. Historically Q3 is down about 5% from the second quarter, so we are pleased with our third-quarter revenue, which came in at the high end of our guidance range. From a segment standpoint, revenue increased in our core language business and in our GDT development business sequentially. Clearly the new programs we secured earlier in the year are starting to ramp.
Our interpretation segment which represents about 5% of our total revenue declined from last quarter and from last year due primarily to the impact of a large contract renewal and a slower summer season for government court cases. Our third-quarter gross margin percentage decline sequentially from Q2 levels, primary due to currency, lower revenue and margin in interpretations, and to a lesser extent work mix changes in our GLC language business as we ramp new client programs.
On a year on year basis, gross margin percentage was essentially flat at 31% on lower revenues. This is indicative of our increased levels of operating cost controls in the business. We reduced our SG&A expenses by about 5 million year on year as we continue to take cost out. So we have taken out about 20 million of annualized overhead costs and despite the negative impact of currency in the quarter, we have reduced our SG&A by another 600 K from last quarter. So our cost actions continue to have a positive effect and more than offset the currency headwinds in SG&A.
Our R&D expenses were also down from prior levels. This is a combination of two things. First, cost management as we reduced costs in our European R&D and second we are capitalizing more software development. As a result, going forward, you can expect R&D to stay at or below Q3 levels. As a result of our ongoing focus on cost, we increased our operating income by 1.3 million year on year ex restructuring despite a $16 million production in revenue. So on less revenue, we were able to increase operating profit. This reflects the benefits of the Lionbridge strategy using our cloud based technology and our lower cost offshore production to reduce overhead costs and improve customer quality. In fact, since the end of the first quarter, we have reduced total headcount by over 130 FTEs throughout our cost of sales, SG&A, and other overhead areas. So clearly our cost actions are taking effect.
With a leaner cost model, we're well positioned to accelerate earnings growth as the economy recovers and sales increase. As you look below the operating profit line, you'll see that other expense totaled just under $3 million this quarter. This is an increase of over 2 million sequentially versus the second quarter. Let me explain. Of the 3 million expense in Q3, about 1.3 million related to the currency revaluation impact of balance sheet items and with the volatility of currencies during Q3, this FX impact was a bit higher than usual. About 500 K of the other expenses in the quarter related to some one-time items and $1.2 million related to a tax indemnification receivable that was tied to our 2005 BGS acquisition. Essentially the statute of limitations on a FIN 48 tax liability reserve for BGS indemnified items expired. While this resolution had a positive effect on our tax provision for the quarter, we had an equal and offsetting negative impact in other expense line to write off the receivables. So this $1.2 million of other expense had no impact on our total net income. The benefit to our tax provision was offset by the other expense.
So for your models going forward, we expect our other expense line item to be roughly 500K to $1 million every quarter depending upon FX volatility. Our tax provision for the quarter was actually $1.6 million benefit. This includes the $1.2 million tax reserve adjustment I just mentioned. This and a few other favorable tax items more than offset our standard provision. Year-to-date, we have a tax benefit of $404,000. For Q4, we expect a more normalized tax provision of between 500K and $1 million. Going forward into next year, we expect a run rate tax provision of approximately 750K to $1 million every quarter as we expect to generate additional operating profits.
Moving down to GAAP EPS, in Q3, we had a loss of about $1 million or $0.02 per share. Excluding restructuring, we generated profit of about a penny a share. Moving to the balance sheet, we had another quarter of generating positive cash flow from operations. We generated about $800,000 during the quarter. While this is down from our record levels in Q2, we expect to continue to generate positive cash flow in Q4 and in 2010 even as we funded restructuring. Simple DSO improved to 50 days which is down another day from last quarter. With DSOs at record lows, we are pitching a near perfect game in terms of working capital management. For a company with so many international receivables, this is even more impressive. I'm very proud of the team's effort in this area.
We incurred about 1.3 million in restructuring expense during the quarter, most of this was cash. Our restructuring actions are clearly helping us reduce our cost structure and offset currency volatility. Going forward, we expect to incur about $1 million to $2 million of restructuring charges every quarter over the next several quarters as we continue to take out overhead costs and improve our cost position and profitability. With an average nine to twelve month payback on restructuring, this is clearly money well spent.
So our primary uses of cash will continue to be restructuring and debt repayment. We ended the quarter with about $24 million in cash. And this is after paying down 5 million in debt during the quarter. Our net debt is now under $8 million. And we're in a very solid liquidity position as we move into 2010. So Q3 marked another solid quarter of balance sheet improvement. We continue to generate positive cash flow. We further reduce DSOs. We paid down debt, and our liquidity position remains solid.
Our Q3 results also underscore our progress in delivering on our key financial goals of enhancing profitability, managing costs and generating cash. In this context, I should also provide some details on how these priorities help us offset the negative effects of currency as the dollar continues to weaken. This is an area that many of you have asked about previously. Let me give you some context. About 50% of our revenue is non-US dollar denominated in a given quarter primarily euro. About 70% of our total cost are non-USD in a given quarter, primarily euro. This means that about 20% of our operating expenses are exposed to dollar fluctuations largely related to the euro, or approximately $20 million at current revenue levels.
So if the dollar weakens by 1% in one quarter, that can have a negative impact on operating expenses of about 200K. So how do we offset that? There are several or three days that we are offsetting this exposure. One, currency clauses with several major customers; two, better pricing negotiation with our global translation suppliers. And third and most importantly, ongoing reduction of our European overhead. This is why our cost reduction actions are so integral to our strategy.
You can see the benefits of our proactive and ongoing costs and currency management. Year on year, we have reduced SG&A by 20 million annualized. As a result, despite the $16 million drop in revenue, we were able to increase our operating profits ex restructuring by over $1 million. And as I said, we have additional cost actions in the plan for 2010. So our cost model should continue to improve. As we look ahead, for Q4, we expect revenue to be between 98 and $102 million. This underscores two important trends, a stronger pipeline of new business and some increased spending from large accounts as they prepare for the recovery.
For 2010, we are providing a very preliminary high level revenue outlook. We expect year-over-year revenue growth of between 5% and 10% and further improvements in profitability. So in summary, I am pleased with Q3. Revenue stabilized after a challenging start to the year, operating income ex restructuring improved year-over-year despite the decline in revenue. We generated positive cash flow and we continue to reduce our debt. We expect additional top line strength in Q4 and we are well positioned to accelerate growth of revenue and earnings in 2010.
Rory, back to you.
Great, thanks, Don. In sum, as you can tell, Q3 was a solid quarter that reinforced a lot of our trends and also it is beginning to show that some of the hard work of the last couple of quarters is beginning to show through. So new business pipeline strengthening, existing customers are spending again, our technology platform is now opening some new opportunities which we are very excited about in 2010 and 2011. SG&A is down by about 20 million year on year on an annualized basis. Increased operating income year on year and we are generating cash and paying down debt.
So to reaffirm what Don said, we're preliminarily feeling about a 5% to 10% increase of revenue for 2010, and we will accelerate our profits despite some currency volatility. And those of you that have looked at currencies, people are saying that the first half of the year, you may see the dollar weaken. Second half of the year you may see the dollar strengthen quite substantially. So it is really more the volatility rather than the specific levels of the currencies that we have to guard against. And so that is what we are transforming the business to prosper in a volatile currency environment.
So I think that in general our task here for next year is really just to increase the slope of all of these actions, try to move the sales bar up a little bit, because I think our fixed expense model will then allow -- our fixed expense reduction will then allow us to convert much of that incremental revenue to increased margins.
So thanks, Don. Shall we open up for questions now, anything else?
Thank you. (Operator instructions). Our first question comes from Rich Baldry. Sir, your line is open.
Rich Baldry -- First Albany
Thanks. Earlier in the year you talked about the 18 million to $20 million cost cut program, looks like you have really realized most of those now, I'm wondering if you can quantify what the next pages of that restructuring as you see throughout 2010 might be envisioned a cut in aggregate? And then also could you talk about and you're talking about some strengthening in your end markets and your larger customers, maybe look at that a little bit more by vertical? Thanks.
Thanks Rich. I think a couple of things. First, remember in March we announced that we would be taking out about $18 million to $20 million of cost in almost a one-for-one. What we found is by – I think we shared with you earlier – is by pacing this over a couple of quarters, it was a much more, a less costly process to do that. So we're actually getting more for less and we see that there is even more to go. So I think that we have probably spent – what's our number so far, about 6 million, 4.5, 5?
We've spent about 4.5 million so far. You can see the results from that are coming through very aggressively and we probably see we could spend another 6 million next year and probably get an equal benefit as well. So I think there is a little bit more to go here, Rich. In fact what we're finding is that with this process we are just becoming so much more effective and productive as we begin to put more and more of this activity into the cloud and move more and more of the engineering activities sort of offshore. So we're about 40% of the way through our announced restructuring, but I don't think we will be spending this much as we originally thought we would. So it is just all around good news.
And then you ask about specific end markets. We are beginning to see people like Microsoft as you know, they are going into a very large product release cycle, and they are our largest customer. As the media market comes back, we are beginning to see some of the search players increase their spend. We're also getting some very nice traction in the medical devices world and also as I mentioned in my script, in my remarks, we had a couple of very nice wins in the automotive segment. So I'm not swinging from the chandeliers yet, but it is a very different environment than it was nine months or a year ago across all of our end markets. There is a firmness, people are beginning to talk about new projects. Just once burned twice shy, I'm just a little hesitant to actually nudge things along until I see this level of interest convert into actual business.
Rich Baldry -- First Albany
And Muir, just for reference sake, could you actually give us the headcount you had on full-time exiting the quarter? Thanks.
4300, that includes India, China, and Eastern Europe of course. Our European, as Don mentioned, in our highest cost locale, meaning Europe, we have taken out about 130 people which is down significantly.
Rich Baldry -- First Albany
Thanks. Congrats on the quarter.
Our next question comes from Kevin Lu [ph]. Sir, your line is open.
Hi, good morning. In terms of the large wins you have announced recently, just wondering if there is a ramping up in the way you expected projects are still coming out according to the timeline that was set forth before you?
Yes Kevin. That is a great question. It really varies by customer because sometimes when you announce these large companies announce consolidation of suppliers from 140 down to 5 or something, there is a great celebration. And then of course the actual behavioral change inside the company has to take place. And so the procurement and re-engineering guys move on to the next project and then we are the ones that have to really come in and work with the sponsors to make the transformation. On general, some were ahead of schedule, some are little bit behind schedule. So I would say on balance they are okay. We are not seeing a – no very real positive surprises and no, oh, my God, they had planned to do X million in this quarter and that has shifted three quarters out.
Got it. And Don, would you happen to have kind of the – be able to quantify the impact of currency on both the revenue and the operating income lines?
Well if you look at the total P&L as I mentioned in my example, a 1% movement equates to about 200K in the quarter. The euro moved by about 4.5% during Q3, so we had about a 900K impact due to FX in the P&L to the operating profit line.
Great. And I thought I heard you mention that going forward you guys might start to capitalize some software development, so I was just wondering if I had heard correctly there, also wondering kind of what that amount might be as we move forward?
Yes. It is difficult to give you any real good guidance on that but it was around 100K that we capitalized incrementally versus what the run rate has been in Q3. And that will pick a bit going forward.
All right. And then just one last question on the release of the Translation Workspace, I think Rory you said the initial returns there are positive, just wondering if you could give us a little bit more color on what you're seeing in terms of the number of customers actually starting out and the like?
As I mentioned, we are not -- this isn't available for general release until early Q1. there are a couple of industry specific tradeshows which we wanted to announce this product. The American Translators Association in New York was one, there are about 4000 or 5000, looks like 2000 to 3000 attendees there. So individual translators is where the first focus is going. A couple of the industry analysts, we showed it to them, very. very positive on the capabilities of the product. In addition, we are finding that the SaaS is of interest because individual translators now don't have to spend $1000 or $2000 up front to outfit their laptop with this technology, for is it 10, is it 15, is it $20 a month depending upon the subscription, they can become a fully functional translator and a supplier to Lionbridge as part of this process.
In addition, we have tested this, we have done some preliminary testing, we will probably do some greater testing, but it also works with the new netbook consideration, so that the total cost of translating or sort of participating in the translation ecosystems now, entry costs are down and total cost of ownership is down considerably. So we will let you know what the actual subscription rates will be starting in January.
The other issue I do want to emphasize, we run a fairly interesting organization here because when you offer a SaaS model or a web-based e-commerce model, most companies get to sort of announce their product in one country or even people rollout geographically. Our product has to be available in 100 countries when you flip the switch. So I think that has been a large part of our development capabilities, to put the appropriate global e-commerce wrapper around this SaaS product to be available at release in a 100 countries. So that is where the last leg of the development is really about the test capability to ensure that we have the responsiveness and the availability in a lot of very interesting countries that have less than robust Internet infrastructures.
All right, thank you.
Our next question comes from Joshua Horowitz [ph]. Sir, your line is open.
Hi, thank you. I just want to commend everybody especially you Don because you knew and you made a tremendous impact, or relatively new I guess, have been the instrument of impact on the organization since joining. And amidst the current economic turmoil, the company has certainly done a lot of terrific things to expand the offering, and I especially like the new deal you announced with Author-it.
That having been said, I will say, and I'm not telling anyone anything they don't know, Lionbridge shares have failed to reflect their true intrinsic value. We are at the same place if not worse than we were a few years back and the company remains in my estimation misunderstood and mispriced. I'm wondering if anyone in the room can speak to either management or the board's thoughts about this and how you would look at a potential share buyback once all of the debt is paid down? I'm assuming of course that this couldn't be undertaken in the last couple of quarters because of pressure from the banks and because you were looking at paying down the debt balance first but certainly you would send a clear message to the market especially if board members themselves would have larger ownership stakes around these levels.
Great, thanks. I guess there are a lot of observations embedded in that comment and questions. So I will take them one at a time. First I really feel as if we bought BGS and it really took us about a year and a half to really get our arms around what the problems were because they were so deep and so varied and so distributed.
We then spent the year and a half really beginning to consolidate that world, largely based on currency and also financial controls. Don's arrival as you correctly pointed out, we focused on balance sheet activities, focused on DSOs, focused on really strengthening the underlying nature of the business. So we're feeling better about where we are with the business.
I think that we're getting a little more comfortable now being a bit more outbound by communicating the future of the business because if you don't have a future to communicate you shouldn't be communicating it. I think that we do have the future now so we're going to get out a little more communicating intrinsic value of the company.
Second issue is really the stock buyback versus debt and board ownership. As you saw, a number of our board members late last year, I recall one was late last year, December, did step in and buy some shares. I think that was an indication of confidence. Second issue is paying down debt versus stock buyback. We bought back a whole bunch of stock as you recall at about 2 -- I think our average price was like 2.75 or 3.10 or somewhere in that range, somewhere around that center of gravity of $3. And I guess I would like to use our cash right now to accelerate the deployment of our technology and accelerate the top line growth because I really believe that with our current cost model, incremental revenue can drive significant earnings for us. So do we receive stock buyback in the immediate horizon, I really think that it would be inappropriate use of our cash right now. I would rather invest in growing the top line.
And what level of cash would you estimate you need to run the business at a level at which you're comfortable?
20 million has been our historic comfort level and that is pretty much where we are today.
Okay, thank you very much.
Our next question comes from Sachin Jain [ph]. Sir, your line is open.
Hi. This is Sachin Jain for Joe Vafi [ph]. Regarding your fiscal 2010 outlook of 5% to 10% revenue growth, can you add some color as to what is driving the delta between the high end and the low-end of the guidance like the various puts and takes?
Yes. I think it is two areas. As you might expect, it is more spending from existing customers, and the number of new customers we can bring on board. And I guess that would be the difference. So I'm feeling very comfortable around the 5% level just because we have seen the spending plans and the relationship plans of our new group. So I'm feeling very very positive with the spending trends of our existing customers and also we have a strong pipeline of new customers. So if everything breaks our way, and if the economy continues to recover, then I think we will be at the top end. But I think that if it is another year of this recovery is a W and not a V then I think we would be at the bottom end.
Fair enough. And then did new client wins recently -- what kind of ramp up time should we expect before they impact the top line?
It varies. Some of them begin within six or eight weeks, others take almost a full quarter of sort of background to transfer the model from their existing internal production or elsewhere. So is it two months to four months, but that is generally the way to think about it.
And finally while recent cost reductions measures are helping margins, can we expect some of these costs to come back as top line momentum returns in 2010 or…
What I think you'll see, you probably won't see much cost growth because we're finding just talking with our head of our Japan operation and he has cut headcount there by about 20% and increased revenues in the past two years. So the reason we bought down was to deploy our technology and get greater leverage from it. So I think that that is beginning to happen. So will there be some cost coming back in, if you see cost come back in, it will be in our sales and marketing line, because I'm feeling comfortable as I said, if people are buying, it is appropriate for me to start selling again. If people aren't buying, there is no reason to invest in selling.
All right, thanks for taking my questions.
Our next question comes from Bob Sail [ph]. Sir, your line is open.
Hi. What was the decision, why did you make the decision to start capitalizing R&D software?
Based on the accounting, the appropriate accounting treatment for certain types of development, internal and external, that is all it is.
I think we have been developing, we have been capitalizing some which is this particular project, the accountants suggested it should be treated. We have been more conservative in expensing things but I think they looked at the way the other things -- the other aspects of our development, they said no, this particular component should be. As Don said, it is about $100,000.
Yes. It is $100,000 incremental over what we have been spending.
Okay. And then the $500,000 of one-time expenses on the other expense item, what were those?
I think the one in particular was a long-standing I think 2002, 2003 sort of employee dispute. Should it have been restructuring, should it have been below the line, that is the way accountants put it [ph].
So it was all related to a particular employee?
It is an employee matter.
2003 is where I think it went back to.
Okay. And then on the just thinking about the movement of currencies, you said the euro moved 4.5% in the quarter. To give us a sense, let's say for Q4 and in quarters going forward, what the impact might be, should we be looking at the average exchange ratio during the quarter or the quarter ending exchange ratio, just again to make a finer point on the guidance?
In the P&L, the example I gave, the average rate for the quarter. For the balance sheet revaluation in fact, it is kind of the end of the periods, so you'd be able to look at both. The P&L example I gave you was just the average during the quarter. So for example, if you looked at Q2 versus Q3, we had about a six penny movement from 1.36 1.42 on average for the quarter.
Okay. And then last question is with regard to the cost restructuring which I think you guys have done a wonderful job on this, I think you mentioned that it looks to me like G&A is down and I think you said 20 million on an annualized basis, but then you also noted that you're 40% of the way through, so is there another sort of a goal that you would like to offer in terms of additional cost reductions over the next 12 months, if I'm understanding what you said correctly?
Hey listen, you are right on. I think that there are two areas of cost management here. One is for the G&A as we are finding we can put more and more into the cloud, we need less and less real estate around the world. So that is one sort of natural fallout as we renew leases, we are taking less and less space. So that is one process. The second process is in our internal cost of sales above the gross margin line. We're just becoming more efficient. As I mentioned in our case, I talked about our Japanese country manager, he has increased productivity there by a factor of two or three just by disciplined deployment of our new technologies. And so even at the European labor markets are less fixable that the US markets, it takes a little bit longer to realign these costs. And so really I think that, do we have an equal opportunity during the next 12 to 14 months, directionally I would say so. It would be above the line, above the gross margin line, and in the G&A line together.
Will the second phase of cost reductions be as significant as the phase that you are really successful at completing?
It really depends on currency, offsetting currently or not. If the dollar behaves as people are focusing which is strengthening – sorry, weakening in the short-term and strengthening in the second half of 2010, it will be additive. If the dollar really stays just where it is right now, we will just be offsetting that currency strengthening. So unfortunately there are a couple of variables here. Again if everything breaks our way, it looks terrific. If things don't break our way, it just looks merely good.
Okay. And one more set of questions if you bear with me. You noted that I think 50% of your revenue is in US dollars and 70% of your cost is in non-US dollars. So there is this $20 million delta. I was expecting a worse hit because of the currency movement between Q2 and Q3. So what do those ratios look like last year, can you delve a little deeper to help us understand exactly how you've managed it so well between mid 2008 and mid 2009?
Well, we do have a little bit more experience in terms of managing this and as we take more cost out, that's really served to mitigate the size of the dollar exposure that you're dealing with. So that is another point. As we said, we took the cost down 20 million year-over-year and the vast majority of those costs came out of Western European locations. So that is the biggest answer in terms of quantifying the delta. But the math is pretty simple. A 1% move is about 200K impact in the P&L and in Q3 I think it is, as I said, the euro moved about 4.5% against the dollar, and that is about a 900K. impact that we saw in constant currency at the operating profit line distributed between gross margin and operating expenses.
And I think as Don said, first it is a lot more experience. We have got – we are attacking the symptom and disease. We have more contracts with currency modifiers in them, so we are less volatile on the inputs. And on the outputs, in the production side of things, we're taking a lot of cost out in the high currency areas. So I think we're just -- we are beginning to see the benefit of three, four, five, six quarters of disciplined action of reconfiguring our economic model and that is just going to continue through 2010.
Great, thank you.
Great. So everybody listen, I know we wanted to keep this call to about 45 minutes. So thank you all. And again, as always if you have any further questions, please give Sara Buda a call. And again I urge you all to go to www.geoworkz.com and you will see a flash demo of the new technology and really the deep feature set that is now available to segments that we don't necessarily serve today. Thanks very much.
Thank you for participating in today's conference call. You may disconnect at this time.
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: email@example.com. Thank you!