Rory Cowan - Chairman & Chief Executive Officer
Don Muir - Chief Financial Officer
Sara Buda - Vice President of Investor Relations
Joseph Vafi - Jefferies & Co.
Joseph Cohen - Louis Capital Market
Kevin Liu - B. Riley & Co.
Joshua Horowitz - Unidentified Company
Bob Sales - LMK Capital Management
Lionbridge Technologies Inc (LIOX) Q1 2010 Earnings Call May 5, 2010 9:00 AM ET
I’d like to thank all participants for holding. All lines will be on listen-only until the question-and-answer portion of today’s conference. (Operator instructions)
I’m now turning the call over to Sara Buda, Vice President, Investor Relations. Thank you. You may begin.
Thank you. Welcome everybody to the Lionbridge investor call to discuss financial results for the first quarter of 2010. During this call we may make certain statements that maybe considered forward-looking statements under the 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 16, 2010 the factors that may cause such differences.
Now, I’ll turn the call over to Lionbridge Chairman and CEO, Rory Cowan.
Thank you, Sara. Today I’d like to talk to you about three things; first, our positive Q1 results that really reflect the forecast affirming of our demand environment; second, our recently announced partnership with IBM; and third, we’ll talk about the progress of our software as a service business with the general availability or the formal launch of our Translation Workspace last week.
So first, let’s start with the quarter. We delivered revenue of about $101 million, and of course this exceeded our forecast as revenue from both new and existing customers continued to strengthen ahead of plan.
In addition, we grew margins year-on-year despite the unfavorable currency environment, and you may remember that the euro was about 139 averaged for the quarter versus 132 a year ago. So that’s about half our revenue is sort of euro denominated. The underlying demand strength was probably even stronger than our revenue top line really portrayed.
We delivered GAAP EPS of about $0.001 a share. In fact we grew GAAP profits by about $5.6 million or about $0.10 a share year-on-year on $12 million of incremental revenues, so almost a 50% conversion from revenue to GAAP EPS. So that was really I think our cost actions, and also just the revenue lift really beginning to show.
Finally, our cash managements remains strong. We generated positive cash flow of about 500K in Q1, and that from our chair is pretty remarkable, because usually we consume cash in Q1 and then grow throughout the year, and so this really marks our first Q1 with positive cash flow in over six years, and that’s since we’ve acquired BGS. So that feels very positive. Lastly, we ended the quarter with about $23 million in cash, so the balance sheet remains strong.
Let me touch on the demand environment that is leading us to such a strong start in the year. We drove about 14% top line growth year-on-year. Now, clearly the last year the world was ending, so it was somewhat an easy compared, but nonetheless, we did drive 14% top line growth and this reflects a couple of positive trends.
First, we are ramping our new business. We won a number of large programs of 2009 across a variety of end markets and life sciences, manufacturing and technology, and in Q1 you saw these programs begin to scale, and I expect these new customers will become even more significant as the year progress.
I do want to underscore, we shouldn’t all be swinging from the chandelier, because of the economy. There is still a sort of double approval process where we win a program, and then the individual sponsor within the business goes back for approval for the specific project under the program. So it’s a double approval process, which is sort of how we run our business here, and how everyone else is still running their businesses. But nonetheless we are seeing strengthening, and we are beginning to see quite a lot of new business.
Second, I think our large accounts are growing, and in fact if you look at our top 10 customers this quarter, and compare them to a year ago, you will see about 20% or 22% growth on those accounts year-on-year, and Google of course is one of our second large. We are a second largest customer now, so it’s growing very nicely for us as we really evolve that partnership well. So in some we are clearly seeing growth return, and we expect revenue to further accelerate in Q2 and in the second half of 2010.
Turning to our profit growth; as I mentioned our $12 million of incremental revenue, growth drove about $5.5 million of incremental GAAP profit year-on-year. I think this proves once again that there is leverage in our business, and because of our diligent cost management we are beginning to see great conversion from every incremental revenue dollar.
So in sum, not a lot more to talk about during the quarter, but I am pleased with our results and momentum we see for 2010. Now lets talk about our partnership with IBM, which is really some very big news for us in 2011, 2012 and onwards.
Two weeks ago, we announced this partnership agreement with IBM, and to refresh your memory it has three important components. The first is an exclusive multi-year software technology license agreement, within which Lionbridge will offer a SaaS-based automated translation capability based on IBM’s real time translation technology.
Now as you know, our machine translation technology is really a big guys game. Its academics; institutions are developers of it, governments are developers of it, large research organizations are developers of it. IBM has been working on this for many, many years, and now I think it’s ready to get out of the lab and into the market, so we’re excited in that front.
The second component is of course, we will be IBM’s preferred deployment partner for the commercialization and the professional services related to this automated translation technology. We have the knowledge of the industry, we have the customer relationships and we have the application knowledge as well to configure and provision this technology.
Lastly of course we had a patent cost licensing agreement, so we both have access to one another’s patents. This allows us really to have unfettered development around this technology. So three components: we are the solo SaaS provider, we are a preferred partner for deployment, and we have a patent crossed license. So this means that Lionbridge and IBM will jointly develop to first SaaS based, fully customizable, multi-label communication platform that will translate enterprise content with a click of a button.
This IBM technology has proven a highly innovative technology that’s been developed in IBM’s T.J. Watson Research Lab for the past 35 years, who combined this technology with our translation memory capability in the cloud, to bring high quality real time translation automation to the market. So in short, we are taking MT out of the lab and into the market.
This is all based on the Cloud-based architecture we started almost three or four years ago now, to allow both their MT engines and our translation memories to exist, to co-exist in the internet Cloud. This is a new offering for Lionbridge and it compliments our traditional translation and localization services, and so let me explain the end markets for this.
So as I described to many of you before, think of our market rather like the pyramid. At the top end of the market there is the traditional high quality services based on human translation. Your cost and capacity issues force companies to reserve their translation dollars for mission critical content. Like the medical device training material user interfaces, a complex software application. This is the core of our global language business. It’s a great business and its growing nicely.
Human translation is simply unaffordable for most enterprise content. So at the bottom of the pyramid, there are a lot of these free translation systems on the web. We’ve all seen them, to translate. Unfortunately these results are of such low quality. The result is often unintelligible, and certainly unreliable for enterprise communications. So human translation at the top end is unaffordable for most applications, and free translation is unreliable.
As a result, the vast majority of content never gets translated. In fact, one industry analyst estimates that organizations translate only 1% of their content. Now these are global corporations, only translating 1% of their knowledge for their global employee base and their global customer partners.
So by partnering with IBM, we’ll provide cost effective solution to reach that middle of that curve, and that’s the largest part of the worldwide market, and we don’t know how large that is of course. So this includes volumes of content that are currently not translated.
From technical support to research reports to user generated content, websites, blogs, community forums, forms to chat and in fact one of the biggest opportunities for real time translation appears to be customer care.
Think of a support person in the Philippines interacting online with someone in Germany in real time. This will make support information available in their language with a click of a button. This will derive significant productivity increases. As you can see, this real time technology has many, many applications and a beta of this application is going on inside IBM today, and our job of course is to configure that for a broader availability.
Lionbridge can bring this technology to market in a way that no other company can and this is because of our translation workspace. We have the worlds largest database of previously translated material in the internet cloud. We can use this content to train the IBM engine. So customers can get a high quality solution that can be customized according to their language, corporate culture, style, glossaries, acronyms, all those things that make communication appropriate for their company.
In addition, our GeoWorkz capability enables the SaaS based provisioning solution to give customers this cost effective, easily deployable solution with a few clicks, so none of the inside the firewall complex configuration and deployment process. So we believe that when we remove the barriers of cost and quality for translation, as a result we will broaden our end-market applications.
In addition, this will increase business for our worldwide translator community. One of the features of this will be if something is showing quite a lot of interest, and it needs to be translated professionally, we’ll be able to route that file to our translator community. So far from eliminating human translation, in fact it will serve up more business to our worldwide translator partners, and as you can begin to see, where the features of the MSP or multi-sided platform that we shared with you about 18 months ago are now all coming into focus.
So this partnership with IBM will drive incremental growth up for Lionbridge and will prioritize this technology over the next nine months or so, and it may require some incremental R&D spend, but I think it feels as if now we are going to be able to offset that R&D spend with the recurrent upside we are seeing in our business. So the impact on the 2010 P&L really should be minimal.
In the meantime, we’ve already received interest from several large organizations to become beta customers for their products. In fact, the response to this IBM announcement has far surpassed our expectations. I received more inbounds from real logos around the world from this one press release than anything in our company’s history.
There clearly is a market need for this technology, and Lionbridge I think is in a unique position to bring this technology to market. So you should see revenue begin to build from this offering in 2011.
So now let me talk about Translation Workspace before I turn it over to Don for the playback on the numbers Last week, we announced the GA or general availability of our Translation Workspace which we believe is the industry’s first and only SaaS platform for translation memory.
This is a secure multi-tenant capability that is now available for customers in over 100 countries. Now I have to say, one of the challenges in our business is, you can’t go live with a product, country, by country, by country. When we flip the switch, you have to be live in a 100 countries concurrently, because that’s our business.
We’ve already started seeing subscriptions flow in. As we said, our first customers will be our own translators. We are requiring our translators and agencies who want to work with Lionbridge to subscribe at the baseline level, which is about 10 euros a month for a freelancer, maybe about 50 or 60 euros for an agency.
The subscriptions are usage based of course, a bit like a cell phone plan. So the more they use it, the higher the revenue for Lionbridge, and this technology they now can use it for their own customers. Now if you are a freelancer working two or three days for Lionbridge, and two or three days for someone else, you will now have a productivity tool you can use for the non-Lionbridge application.
We have about 3000 to 4000 active translators and agencies that work with Lionbridge, and we expect about 80% of this base to convert by the end of the year. We are giving people a 90-day or 120-day, whatever the timeframe is, to free sort of conversion, as they have to really move from an existing platform to a new platform, and just think about how much time it takes you to move your bank account or to move any other online subscription that you use when it comes to an appropriate timeframe.
So we should have everybody on the platform by year-end, and over time we expect the revenue to grow. As there are about 500,000 translators worldwide, and so they will be able to realize the benefits of Cloud computing. The ROI for them is very, very strong as they don’t need back up, they don’t feed other computers. We then tested this with using 300 to 400 other networks. So it will make it a very inexpensive means for a translator to earn a living from wherever they are in the world.
So as we begin to scale the business, we’ll give you some relevant metrics in terms of subscribers in usage. We’ll probably start that probably at the end of Q3 or end of Q4 when we get a sense of what the relevant metrics are, whether its usage-based actual subscribers, language barriers, we’ll figure that out over time.
Regarding cost, the heavy lifting on the technology development is done, but clearly we are now kicking into additional features and other applications on the platform. So we are in a position to drive some really highly profitable revenue as we grow subscriber base during the coming year.
So in summary, revenues surpassed our forecast of $100 million, $12 million incremental revenue drove about $5.5 million or $6 million of bottom line profit. We are generating cash, Transition Workspace brings SaaS based language technology to market, and our partner with IBM will allow us to develop new automation technology to expand our end markets inside of our projects.
So I’ll let Don talk about the activities inside it and to summarize the outlook for Q2.
Thanks Rory and hello everyone. Today, I’m going to walk through our Q1 finance results, which reflect a strong start to 2010, and I’ll also provide an update on our outlook for Q2. Let me begin with an overview of the first quarter.
In Q1 we delivered revenue of $100.8 million. This reflects 14% year-over-year growth, and is about even sequentially with Q4 ’09 adjusting for currency. Q1 tends to be our slowest revenue quarter as client programs begin to build. So we are pleased with the quarter’s top line results and we expect continued sequential and year-over-year growth in Q2. Gross margin was 31.6% for the quarter, this is about 80 basis points higher than a year ago despite a more unfavorable currency environment. The gross margin percentage improvement was primarily driven by our core language business growth ingrwo growth in Q2.
Gross margin was 31.6% for the quarter. This is about 80 basis points higher than a year ago, despite a more unfavorable currency environment. The gross margin percentage improvement was primarily driven by our core language business GLC, which increased 220 basis points year-on-year on higher volumes, and the cumulative impact of cost management actions.
Margins in GDT, our development and testing business were about flat year-on-year at about 35%. As expected, margins in the first quarter were lower on a sequential basis compared to Q4. As you know, we had a very strong fourth quarter performance in GLC at the end of the year, with high margin product releases from existing customers. Q1 had a different work mix profile as we ramped new accounts.
On the cost side, we also continue to manage our operating expenses during the quarter. Below the gross margin line, operating expenses declined 550 basis points as a percentage of revenue year-over-year. We incurred $1.2 million of restructuring cost during the quarter, as we continued to generate some expensive overhead in high class locations.
Income from operations was $3 million in the quarter ex restructuring. This is a margin improvement of approximately $6 million year-on-year. Clearly we are starting to see operational improvement as revenue returns and our cost management actions take hold. We also continue to effectively manage currency and tax. Our other expense line was only $274,000 this quarter, despite the currency fluctuations, and tax came in at about 700K in Q1, which is inline with our estimates.
On a GAAP basis, we reported earnings of $477,000 or $0.01 per share. Adjusted earnings was $0.06 per share in the quarter. This shows the ongoing profit growth in the business. So with improving margins and strong expense management year-on-year, we are able to drive significant profit on incremental revenue growth. In fact, on $12.4 million of year-on-year revenue growth, we grew $5.6 million straight to the bottom line, a 45% conversion rate. So you can see the value of our solid revenue growth.
As we said in the last call, we have made changes in our sales strategy to focus on two areas; vertical market expansion, and multi-year commitments. We are making positive improvements in both areas. By focusing on long-term contracts in profitable vertical markets, we are able to accelerate earnings as we grow revenue.
Moving to the balance sheet, as Rory said, we generated about $0.5 million of cash flow from operations in the first quarter, which is quite positive given the cash consumption and negative operating cash flow we typically see in Q1. We have sustained our focus in working capital management, as DSOs continue to be in great shape at under 50 days. We ended the quarter with about $23 million in cash. Our bank debt remains at about $25 million.
As we said in the last call, we are comfortable with our debt at these levels given the cash flow of the business, and our favorable bank line. So in addition to funding and restructuring, we feel it is time to focus on innovation and growth, and that is exactly what we did in Q1 with our investment in the IBM partnership, and the launch of Translation Workspace.
So going forward, you can expect us to continue to use our cash to fund some restructuring, and you may see some additional investments in technology as we work with the IBM team, to bring this new Real Time Translation product to market.
Finally, you saw that we announced our shelf registration. 70% of small caps have shelf registrations in place. So this is just reflective of prudent financial management, and gives us some flexibility if we need it down the road.
So to summarize the quarter at a high level, revenue was strong year-on-year with 14% top line growth to over $100 million in the quarter. Gross margins improved 80 basis points year-on-year, thanks to increased revenue volume and the benefits of our cost management.
Our operating income improved almost $6 million year-on-year ex restructuring, and with continued tax and currency management, much of that improvement sell right to the bottom line, and we continue to generate positive cash flow from operations.
Let me wrap up by talking about our outlook for the second quarter. In Q2 we estimated revenue in the range of $100 million to $105 million, and this is despite a roughly decline in the Euro since the beginning of the year. As you know, a weaker euro may pressure the top line of the business, but strengthens our bottom line. So currency seems to be moving in our favor.
Our customer environment is clearly strengthening as new and existing customers begin to spend again. We are benefiting from our strong cost management, and we expect continued earnings acceleration in the second quarter.
Rory, back to you.
Thanks, Don. So you can see it’s been an exciting start to the year. I don’t want to sort of replay the numbers anymore here, but it is very clear that during the downturn when no one was buying, we didn’t put a lot of energy into selling, and instead put our energy into cost reduction and development of technology.
Now as the world’s awakening again, we are putting our money into deploying that technology and selling again. So I think that its a pretty traditional management as you go through a business cycle.
We are benefitting from these cost reduction actions, and incremental growth is driving solid profit conversion, and I think you should see some very real strength as our technology begins to drive revenue during the second half of this year and early next.
So with that, I’ll open up for questions if there are any. Its a pretty comprehensive quarter, so lets hear it from the field.
(Operator instructions) Our first question comes from Joseph Vafi - Jefferies.
Joseph Vafi – Jefferies & Co.
Just maybe a little bit more color on the top line. I think Rory you said that you saw strength in the top 10 customers. Any color there in terms of specifics? Is it just more projects or is there something else going on in terms of maybe some of the projects you are working on are getting larger.
Then secondly, it looks like the outlook is again calling for a pretty strong Q2, is that follow through from large customers or is there other visibility emerging in the business on the top line.
Good questions, both. First, we did gloss over the sort of top 10 of growth here. I think that we saw firmness across the board from our large customers, and if you think of it, we focused the top of the pyramid and those are the large customers, and we have a fabulous customer set; this is an indication. I think our DSO was in the 50 days or so. So you get a real sense of our focus on large customers and how that’s really working for us.
While we did see the top two or three grow faster than the rest, which I think is an indication that they are now also having the confidence to release more products. So we are beginning to see just -- we are sort of this ring side seat I guess on economic activity, because we have large customers across all markets and all countries, and we are just beginning to see a lot more customer activity.
Much of it is web based, much and more of it is becoming sort of streaming content and it’s configuration, and I think there is an anchor toward the tech sector as well with the growth that we are seeing.
We have lots of new non-tech customers, but I think as you might expect in this phase of the recovery, tech tends to get out front often pretty early, and it’s because it’s an easier process to release products in a new manufacturing or a traditional industrial cooperation. So more products concentrated in the big tech customers might be the way to the first question.
Second question, as we go into Q2 and Q3, we mentioned last year that we did close a number of new customers, and it really takes either six months or nine months before you actually finish the negotiations with the client, until products and programs really transfer from either in-house operations or from other providers to Lionbridge, and so I think in Q2 and in Q3, you are probably going to see some strength from newer names in our portfolio here, so I think our top 10 will probably change.
I’m not suggesting that Microsoft and Google and HP and Nokia will moisten, and Oracle are going to fall out of our top 10, but I am suggesting you may see some new names in the bottom as people work with their product cycles as new customers ramp and maybe perhaps some of the smaller customers in our top 10 work on different cycles.
Joseph Vafi – Jefferies & Co.
Okay thanks, and then maybe one question on IBM partnership. I know its still a little way out before you kind of really start to sell anything here, and there is going to be some R&D work for the next couple of quarters, but strategically if you look at this, to the extent you can kind of talk about it, because it might still be forming.
The go to market strategy here seems more software centric than your business is today as a service, and how do you approach that market? Are you going to be more of a software vendor do you think at that point in time than you are today?
Well, I think that we’re this new sort of technology led services company coming out from the services side. I think with the conclusion IBM drew and the conclusion we drew, is that we have a very sophisticated technology that was largely funded by defense applications over many years.
To train that technology, configure, and deploy that technology, you need some one inside the business, we are that person. We are going to be layering on top of that, some of our software and technology, to jointly offer this to a series of customers. The way its feeling now is that, this is going to be a feature in a larger scale deployment, we will say with IBM global services or with any of the other players that have contacted us.
So it will turn more toward a technology revenue structure, but we are also excited that it would just drive more traditional services that we know how to do, because as we mentioned one of the key offerings in this sector is that you will be able to use automated translation in real time, so IMs, blogs, and other things, but there will be FAQs on a technical support side or a self-service support side that might need professional translation for greater precision, so that will just drive more services through our platform.
So, yes, Joe you’re right we are going to turn more towards a software revenue stream over the next couple of years, but I’m excited about the services component because that’s what we know how to do very well.
Your next question comes from [Joseph Cohen - Louis Capital Market]
Joseph Cohen - Louis Capital Market
That’s for taking my call guys. I just wanted to ask a little bit further, potentially what kind of impact the Euro may have on your top line. I guess you briefly mentioned that it would hurt the top line, but it strengthens the bottom line. Can you just go into that a little bit further?
Sure, I’ll be happy to do that, this is Don Muir. Essentially, if you look at it, about 50% of our revenues are USD and about 50% are non-USD. The non-USD pieces predominantly Euro and our operating expenses including cost to revenues are roughly 70% non-USD, primarily Euro denominated and 30% USD.
So at the gross margin line, you have depending upon which way the Euro moves, kind of a perfect edge in dollars, so that’s kind of a wash. The gross margin percentage may move around a little bit, but the gross margins dollars are pretty much perfectly hedged there.
Where we see an impact for us, is really in the operating expense line. In fact, if you have a weak Euro, you are obviously going to have lower operating expenses. Every penny in the Euro drives about 500K or 600K of reduced operating expense in an annual basis for us so 150K quarter so.
You guys take a little bit of a revenue hair cut on that 50% of the non-USD revenues that are Euro related, but you are going to pick that up and offset it if it’s favorable on the bottom line from an operating profit perspective, because our operating expenses will be lower.
Joseph Cohen - Louis Capital Market
So basically, it’s a wash?
Its a wash at the gross margin line, but at the operating expense line you don’t have the offset of revenue so that you, just going to see whatever the changes in Euro versus dollar drop to the bottom line. So the weak Euro will be favorable and the strong Euro will be unfavorable.
I guess that we are rooting for a weak Euro.
Your next question comes from Kevin Liu - B. Riley & Co.
Kevin Liu - B. Riley & Co.
Just a couple questions on the shelf offering, just wondering if there has been any change in your willingness to take on some additional [Inaudible], I know you guys have been successful in paying that down. And then also if you could update us on just kind of priorities for how your cash will be deployed now that you are getting near the tail end of restructuring efforts, as well as getting kind of a level of dept that you are comfortable with.
Thanks Kevin, I think we’ll handle those in reverse order. First, we mentioned in the beginning of last year we announced an $18 million to $20 million cost reduction of program. As you may recall, some of our bank covenants didn’t allow us to move as quickly on those as we might have hoped.
Now, with our profitability performance, we really have quite a lot of freedom. So we still have some more cost reduction to come through that will give us increased leverage in next year’s statement. So, I don’t want to say cost reduction is behind us, there is still more room to reduce cost. So I think that’s first.
Second, we have an excellent banking relationship. We preserved it through the downturn unlike other companies, we tripped no covenants, and we focused on what we run in the business. As a result, that line goes through the end of next year. So one of the questions is, do you renew now to get four or five years or do you just stick with the line -- and those are normal sort of ongoing issues that you would do at a company.
The third issue, taking on more debt, I’m not in the mood to take on more debt right now. I think that our focus now is really to execute and invest behind this multi-sided platform that we are developing because the IBM deal, for example would not have made any economic sense to them or to us if we did not have this cloud based MSP that we are developing.
So, I think this is an indication that our strategy of technology led services strategy is really the way to go. I think our focus here now is to keep our heads down, stay focused on the business.
Now, that doesn’t mean that there might not be some tuck-in acquisitions as there are a lot of venture guys that are trying to rebalance their portfolio right now and we just want to have some flexibility, should something like that come along. But there are no plans for something like that at this moment.
Kevin Liu - B. Riley & Co.
Moving to the Real Time Translation Service. I know it’s fairly early on, but curious as to whether you have a sense when you can get some of these customers that are requesting data is actually testing the product and any sense for whether the product could be launched, is very generally in 2010 or would this be more of a 2011 event?
Yes, I think that the idea of getting it out of the lab and into the market is really a test for the remainder of this year. IBM of course is using this internally in a number of data’s and that gave us the confidence that with our knowledge and skills we could refine that and make that a repeatable, deployable offering rather than a one-off internal deployment.
I don’t mean to trivialize what IBM has done internally, that’s not the case, but they have really focused for one or two applications internally. My bet, we will try to get some, what I’m calling visionary customers by the end of the year and we’ll probably get to see revenue from this program some time early next year.
Your next question comes from [Joshua Horowitz – Unidentified Company].
Joshua Horowitz – Unidentified Company
Thank you, and good quarter guys. I guess my question again like some of the others on the call relates to the IBM announcement, and I know it’s a little bit premature perhaps, but given that a lot of the longtime shareholders are really waiting for an opportunity like this, we are very pleased and delighted, and I guess we would just like to get a little bit more color as to where you see the opportunity size, what segment of IBM it falls into and what could new business here really look like in practice from a logistical or economical standpoint.
Can you sort of walk us through, what a contract could like, who the customer is and then how revenues and margins are shared between the organizations?
Yes, I think the way I think of this is, this relationship will probably have three or four different revenue streams. The first and the most immediate one is to partner with IBM on programs that they have with joint customers, because our Real Time Translation is needed for many applications, as I mentioned e-support.
As I mentioned with their collaboration suites, software that they are offering worldwide, you cannot collaborate with non-English speaking employees and as much knowledge with global corporations you have to interact with your peers in China or Japan or Germany, this will sort of allow collaboration at a very lite, L-I-T-E level to accelerate.
So, in that sense, we will configure it, we will train that application for them with our data and then we will have a recurring license fee and we are still figuring out whether that’s a per seat fee, whether its a server-based fee, but we are visioning that there will be a configuration fee, a deployment fee and then ongoing maintenance fee.
So that might be the traditional joint product sale. Another application for this of course would be allowing all of our translators and agencies around the world, access to this through Translation Workspace.
For now its sort of $10 a month, they get an access to a translation memory. For an additional fee, they maybe able to use this engine with their content to train the engine for their customer set, because the way this works of course is you need to train an engine for a particular language fair and a particular domain. That’s what we know how to do, and that’s what will allow translators and small agencies to so. So the second revenue stream might be the general crowd who will be interacting with the platform.
A third revenue stream might be embedding this in other applications. So I can see that software that people use to deploy, to manage contacts, contact management software in call centers for example. We might then take that content, train it, so they can use it for all their FAQs or frequently asked question interaction.
When you deal with customer support and you IM back and forth, many of the questions that are unique to you, are probably the hundredth time that agent has gotten that question. So those things can now be handled and trained in a multi-lingual fashion. You don’t need a German speaker managing Germans, and a French speaker managing French. You going to be at a greater leverage from a low cost contact center, that’s another application.
We’ve also had inbounds from people for iPhone apps for example, for mobile workers, or you could see hosting this with a wireless provider, because of the SaaS base application. So we are now ordering the opportunities for this over time, but I think the near-term opportunities are going to be inner product scale, joint development with IBM.
That’s why I said, services you’ll probably see first will have a software piece and of course then we just give a percent of the licenses back to IBM for the engine activity. So it’s the nominal license fee for our redeployment and configuration.
Joshua Horowitz – Unidentified Company
We usually to evaluate the service-based deals first, maybe its an obvious question, but in terms of the net present value, you are not going to be forced to spend a meaningful build out of resources for some sort of meaningless cash flow stream that trickles in just, and just because IBM as part of the agreement says you have to do it.
Couldn’t have said it better.
(Operator Instructions) Our next question comes from Bob Sales - LMK Capital Management.
Bob Sales - LMK Capital Management
On the Translation Workspace you mentioned that you lose $10 a month and the contract service providers providing services to Lionbridge would be required to sign up to it. Can you talk more precisely about whether or not this is a revenue opportunity; in other words should we see the impact on the top line or is it something that is offset within the expense structure.
Now, this will be a revenue increase, because the translators will be able to use this, and we should have been clear about this probably, that’s a great question, because translators will be able to use this software for their other projects.
The revenue we get from each translator will be booked as revenue and not a cost offset, and we’ve been testing this with a number of translators; and for them the ROI is quite compelling, because the current solution today is to buy a software license, by a rather sophisticated desktop computer with all the backup requirements, all the maintenance activity etc.. This is a classic SaaS based, one click, swipe your credit card, and your totally enabled. So the ROI is quite compelling for individual translators.
Bob Sales - LMK Capital Management
Can you describe again what your expectations are in terms of the number of seats that you expect to license just though your own contractors?
As I said, we have about 3000 or 4000 current partners that we are using at one time. In our database you probably have 10,000 or 12,000 individuals to whom we can route work. They are on this platform today, because that was part of the transition that we know the software works.
Now we are configuring it and offering it to them to use for there other applications, because remember, our freelance work force probably works for us two or two and a half days a week, and works for others two and a half days a week. So they have to learn multiple bits of software and have multiple customer engagements.
So as I said, at any one time we are using 3000 or 4000 translators. Lets assume that we get everybody on the platform by year end, and then you have about 10,000 or 12,000 translators that actually want to do work with us, but there are 500,000 translators worldwide. So that might be the upper balance of the market of course.
I’m not suggesting 100% market share, although it would certainly be nice, but then you begin to see someone is on this platform, we will be able to offer them more features; linguistic quality tools for example or as I mentioned an application of this IBM software, this real time translation software they can use it for just a productivity tool, to translate and post edit some of there other customers work.
So we really spent the last year and a half configuring the provisioning capability, and re-architecting the product to multi-tenants architecture, that’s really what we did in the past year and a half here.
Bob Sales - LMK Capital Management
Okay thank you, and Don just a couple of question for you. Can you go over one more time, how we should expect taxes for the balance of the year?
Yes, I think as we said in the last conference call, somewhere around 750K per quarter, three million for the year, and we are right in-sync with that in Q1 at about 700K tax provision. So that’s what I would use going forward.
Bob Sales - LMK Capital Management
And then Don just to beat the drill of simplistic. You said the euro was 139 on average in Q1, and I’m just looking at the Bloomburg here, it’s 128. So is the simple math in terms of the bottom line benefit eight percentage point times a 150,000 bottom benefits for the upcoming quarter, assuming all things are stable on the currency front.
We have the rolling average for the quarter we have to recall. So the average euro for all of Q1 was 139. Right now we obviously have one month behind us for Q2, which is well north of your 128. So the average for Q2 will probably be somewhere in the low to mid point 30 if that’s right, so we’ll pick up a little bit, but the rule of thumb is if it move about penny, we pick up about 150 K in operating expense reduction. So that’s the way to look at it.
So that seems to be it, nobody else in line. Operator anybody else?
Showing no questions.
When you have a good quarter, there’s not a lot to talk about. Thanks a lot everybody and always you can get back in touch with Sara if you have any further questions for Don or me. Enjoy the sunny day.
Thank you. That does conclude the call. You may disconnect your phone lines at this time.
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