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

Lionbridge Technologies, Inc. (NASDAQ:LIOX)

Q1 2014 Earnings Conference Call

May 8, 2014 9:00 AM ET


Sara Buda – VP, IR and Corporate Development

Rory Cowan – Chairman and CEO

Donald Muir – CFO


George Sutton – Craig Hallum

Kevin Liu – B Riley


Welcome and thank you all for standing by. Participants will be in a listen-only until the question-and-answer session of today’s conference call. (Operator Instructions). This call is being recorded. If you have objections you may disconnect at this point.

Now I’ll turn the meeting over to your host, Vice President, Sara Buda. Ma’am you may begin.

Sara Buda

Thank you. Welcome to the Lionbridge Investor Call to discuss financial results for the first quarter of 2014. 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 March 14, 2014 the factors that may cause such differences.

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

Rory Cowan

Thanks Sara, and welcome everybody. Today I’ll talk about our Q1 results and the positive moment that is driving our strong Q2 outlook. I’ll also touch on our ongoing growth and marketing services and some early successes around our new online customer acquisition models that we are investing in last year and are now beginning to show some very real enthusiasm. Then of course Don will walk through the specifics and the financial detail.

So first let me summarize the quarter. It is clearly work in the late quarter. In Q1, we grew revenue about 6% year-on-year came in a little over 120 million as you see. Of particular delight was that our GLC Language and Content segment was very strong in the quarter with growth about 12% year-on-year. So the strategy really is working. We are extending our crowd and cloud model to new offerings and broadening our services across our client’s global content needs.

Good cost control and increased revenue meant that gross margins were up about 290 basis points year-on-year to about 31%. This drove GAAP earnings of about $0.03 a share well ahead of expectations and most importantly the strong track record of earnings conversion continues. Our Q1 incremental revenue drove a 55% conversion rate to operating profit for the year. So about 55% of the incremental revenue dollars went straight down to operating profit. So record Q1 revenues and really very solid adjusted earnings.

So Q1 was a solid quarter. We grew the recurring relationship with large existing clients and we have also seen some ongoing momentum in content and marketing services. We drove another strong quarter of positive earnings growth and so a very straight forward quarter.

Now I’ll touch on the demand environment that’s leading to our strong outlook for Q2 and for the rest of the year. First, we continue to scale many of our large recurring revenue relationships. In Q1 we saw solid year-on-year growth from Microsoft, Rolls-Royce, Porsche and a number of others. In each case we are expanding the portfolio of services we deliver from just traditional translation to marketing services to content offerings. So we are just broadening our relationships as we begin to focus on the entire value chain.

Late in the quarter we also begin a new engagement for a cloud based testing of mobile applications for one of our clients in the consumer tech area. And this again is taking our translation management capability or global cloud capability and applying it to mobile device testing.

So, despite some minor spillage into Q2 from one of our larger clouds and few sort of smaller you know enterprise the sort of lumpiness we see with some of these relationships. I am pleased with our ability to grow our large recurring relationships across all end markets. So we are applying this crowd in the cloud skill to address a broad range of enterprise applications.

So second, we are seeing strong new business momentum as well, particularly in three key areas remember about last year I stated I felt comfortable enough to start investing a little bit more in sales and marketing role. We are beginning to see the results of that this year.

So the three key areas are really traditional translation, marketing services and new online channel. So let’s touch on each of these. First, new wins in the traditional translation business, at the beginning of Q1 we announced a number of new customer engagement across diverse end markets, from automotive to manufacturing and industrial to consulting firms.

The new business momentum continues. In addition to the wins we have talked about in January we have recently secured new business with a well-known leader in eCommerce, a European financial services company and the enterprise cloud IT company. So our new business continues to ramp across diverse markets and these have some significant relationships in their future.

Some of these new engagements scale within weeks as we saw with the new eCommerce win others take longer and will begin ramping in Q2. The time to ramp we are finding really varies significantly by clients. Some can take three, four, five, six months some can be three, four, five, six days, it really depends upon the organization of the customer, the type of initial engagement and whether or not there are a lot of technologies and platforms that we have to align so they can talk to one another. But the pace of new business is strong as well as the size and duration of the contracts more importantly. So our increased investment in sales marketing I mentioned last year it’s really beginning to pay off.

So, second new marketing services business so we have talked about the translation business, now let’s talk about the new marketing services businesses. As many of you know one of our catalysts for growth has been our successful expansion into marketing services. The skills we developed managing complex global product releases enable us to address the needs for global marketing content. We now offer a broad range of marketing services and for some clients we provide straight forward web translation across their micro sets worldwide.

For other clients we provide a complete outsourced solution to manage their global digital marketing initiatives from global email campaign management to search marketing to social campaigns. We have this unique combination of local market expertise cloud-based technology, and proven global project management. As a result we are ideally positioned to help marketers manage complexity of real time digital content across geographies platforms and languages. And it’s very important to us to underscore that we are platform agnostic in this offering. So we have APIs into all sorts of the new marketing services platforms which I think gives us a significant advantage in this area.

We expect to grow our marketing services offerings both organically and potentially through acquisition throughout 2014. So the third leg and finally for growth is really the new channels of our customer acquisition. A few weeks ago, we announced growing momentum for a new Lionbridge onDemand platform and as we have mentioned in the last call onDemand is a new online model to capture decentralized demand and large enterprises for what we call transactional translation. This is a need to quickly translate a video or web page an in-design file a mobile app or document in order to meet a deadline and still follow corporate policy.

So think of this is sort of an enterprise aggregation portal where anyone in the organization can just drop content in to our system and there is pre-defined work flows, some pre-defined applications and they will be able to get their content back quite rapidly with very little interaction. We believe onDemand is the first enterprise platform of global scale to really address this demand in a reliable corporate secure model. As a fully web-enabled model onDemand enables various buyers across the enterprise to access the full suite of productized offerings with a simple click.

Q1 was the first quarter of onDemand. During the quarter we had almost 198 clients use onDemand including 15 Fortune 500 companies. And we saw a 35% repeat rate within the quarter which shows the opportunity for onDemand to really be a centralized aggregation platform for rapid turnaround translation products across the enterprise.

Based on the strong response we are seeing with both existing and new clients in onDemand we think we should generate to $8 million to $10 million in revenue during 2014 for onDemand, that’s $8 million to $10 million in revenue for onDemand in ‘14 and to ramp further in ‘15.

So we have multiple channels to drive demand, as sort of human-to-human with traditional enterprise sales for large complex programs, hook up human-to-web with onDemand where people inside the organization can access our capabilities through the web. And the next thing with what we are spending time with now is what we call web-to-web models with APIs and connectors where we are building sandboxes and building some self-provisioning capabilities and you’ll expect to hear a lot more from us in this area in the coming months because we are finding many platforms from web content management to industrial part catalogs, to marketing automation platforms all sort of software needs to talk to this onDemand platform that we built but then of course drives all this translation through our existing crowd and the cloud infrastructure. So it’s a pretty exciting ‘14 and ‘15 outlook that we have.

So in summary, Q1 was a solid quarter and our Q2 ramp is really building on plan. We are growing large recurring revenue relationships; we’re driving new business across the end markets. We are scaling our marketing services offering. We are complementing our traditional enterprise sales model with online channels to drive further growth and we continue to generate strong profitability with incremental revenue.

So, I will turn it over to Don for more details on the quarter and the outlook for Q2.

Donald Muir

Thanks, Rory and hello everyone. Today, I am going walk through our Q1 financial results and I will also provide an update on our outlook for Q2 and some of the positive trends we are seeing in the business. Let me begin with an overview of Q1.

In the first quarter we delivered revenue of $120.2 million. This reflects a year-on-year increase of 6% or $6.5 million from last year. From a segment standpoint we saw strong 12% growth in our GLC language and content segment. Our testing segment which we now refer to as GES or Global Enterprise Solutions was down about 6% year-on-year. As we said in our last call, testing has a tough compare this year as the large program we scaled in 213 moves into maintenance mode.

Despite this as you can see from our guidance we are seeing our traditional Q2 sequential ramp take hold. So from a revenue standpoint this year feels a bit like last year, a slow start to the year followed by a Q2 ramp and ongoing strength in half two.

On the profitability side margins are trending ahead of expectations. In Q1, total company gross margin percentage increased almost 300 basis points year-over-year to 30.9%. On a segment basis gross margins in GLC were 32.8%, gross margin in GES were 28.9% and tests were 14.8%.

First quarter operating expenses, increased minimally about $1.3 million year-on-year driven primarily by higher SG&A. So our two initiatives of increasing automation and restructuring are benefiting our gross margin and allowing us to control operating expenses. This drove GAAP operating income of $2.1 million in Q1. This represents a year-on-year increase of about $4 million. So once again incremental volume continues to drive solid earnings conversion particularly in the GLC segment and we expect this positive trend to continue.

Moving down the income statement, this quarter we had benefit in the other expense line of about $350K. As of you know that other expense is largely related to the currency effect on monthly balance sheet item revaluations. So this quarter a few currencies and some miscellaneous items worked in our favor. And overall we continued to manage our FX exposures quite well.

Our tax provision was about $450K in the quarter. As we have discussed in prior calls and for your models going forward we continue to expect our quarterly tax rate to settle in about 25% commencing in Q2 as we achieved consistent levels of meaningful profitability going forward.

On a GAAP basis we reported net income of $1.9 million or $0.03 per diluted share in Q1, growth of almost $5 million or $0.08 from last year and well ahead of expectations, adjusted earnings of $0.08 in the quarter. So Q1 was a solid quarter. We grew revenue of 6% year-on-year. We improved gross margin almost 300 basis point year-on-year and we exceeded expectations for earnings with GAAP EPS growth of $0.08 year-on-year.

Moving to the balance sheet, operationally we consumed over $4.6 million of cash during quarter. This was consistent with our typical cash flow seasonality. We tend to consume cash in Q1 followed by a strong cash flow in the second quarter and the remainder of the year. DSO remained in great shape at 49 days which is about a day lower than the fourth quarter. You will see that unbilled receivables increased in the end of the year. This is largely related to timing of invoicings and linearity of revenue in the quarter. And this is consistent with our normal Q1 seasonality.

Capital spending was $1.8 million in the quarter. For the quarter we expect CapEx to run about $10 million roughly consistent with prior years. We ended the quarter with about $32 million in cash and our bank debt remained at $27 million.

Let me wrap-up by talking about outlook for the second quarter. We had a strong finish to Q1 which is continuing into April. So we have good visibility to a strong seasonal ramp. And as Rory mentioned new business is accelerating as well. So for Q2 we are estimating revenue in range between $129 million and $133 million. This would be a sequential increase of $9 million and $13 million from Q1 and a year-on-year increase of between 5% and 8% compared to last year’s Q3 and we expect margin and earnings improvement in Q2 as well.

For 2014 we are reiterating our revenue growth estimate of 5% to 10% and are comfortable with the current revenue consensus for the remaining three quarters of the year. We also continue to expect gross margin improvement of at least 50 basis points year-on-year. So business momentum feels strong, revenue continues to build, we exceeded earnings expectations in Q1 with strong margin trends particularly in our GLC language segment. Our Q2, revenue outlook shows a strong seasonal increase and we expect our positive revenue in earnings momentum to continue in the second-half of the year.

Rory back to you.

Rory Cowan

Thanks Don. So there’s not really much more to add before I open up for questions other than revenue is growing, margins are expanding and we are ramping the new business across the vast majority of our offerings and we have a lot of new channels to accelerate growth in the reminder of the year and ‘15. So with that I’ll open it up for questions.

Question-and-Answer Session


Thank you, sir. We will now begin the question-and-answer session. (Operator Instructions). Our first question is coming from the line of [Randy Hogan]. Your line is open sir.

Unidentified Analyst

Thanks. How should we think about seasonality for remainder of the year? You said you were expecting continued strength like we saw last year. Should we expect I guess quarterly increases like we saw last year or might things level off at the second quarter?

Rory Cowan

Yeah, I think that we will probably see some strength in Q2 and then probably level up but slight increase. So you know with a firming bias. I think a lot of it really depends as I mentioned on the scalability of some of the large programs that we won. We are finding companies just have different cultures and different technology sophistications and it just takes longer to get some of these companies to ramp then we thought and then others over them will just shove everything over the wall we are billing the next week, and so I think – and that timing can have a couple of millions of dollars on these projects. So it’s a little difficult to forecast so, I would say strengthening in Q2 and a firm bias us you know flat to firm on Q3 and 4.

Unidentified Analyst

All right, thanks. And are there any products or clients where your expectations have changed since last quarter or are things just kind of going, I guess slow and steady?

Rory Cowan

Yeah, I think things are going pretty well. I think, there are always some of the big techs with some of the projects and some of the reorganization and whether there is fits and starts with product releases. But as we get larger those have a less of an impact on each quarter. Whereas a few years ago that lumpiness of the episodic nature that you guys used to talk about was quite pronounced. As we got a little bit larger the plus and minus a couple of million dollar a quarter really doesn’t have the earnings impact it used to.

So I think that’s the only thing that we are seeing with big tech right now is they reassess product launches. I would say we are seeing a little bit more from our newer offerings and our new sort of customer acquisition of models. So we are pretty excited about onDemand and marketing services.

Unidentified Analyst

Thanks a lot.

Rory Cowan



Thank you sir. Our next question is coming from the line of George Sutton. Your line is open sir.

George Sutton – Craig Hallum

Thank you. Rory, relative to 5% to 10% growth for the year are there [roll outs] necessary for you to be at that upper end of that range and I’m thinking of this roll over the acceleration of new demand you are seeing?

Rory Cowan

Yeah, I will start and Donald can add some color to the by play. You know you do the math and it seems as if a lot of our large customers are on path. Having said that pushing it’s a 10% for the remaining three quarters there a maybe a little bit of a tuck-in acquisition there may be some other things happening. I think my sense is it feels better to stay around the middle there and to hit our numbers we don’t have to go much higher than that so, Don what are your thoughts.

Donald Muir

Yeah, I think as we saw in Q1 we had a great strength in GLC segment and as we said we expect the GES segment formally GET to be flat this year. So that probably drives you more towards what Rory saying kind of that in that 6% to 7% range.

George Sutton – Craig Hallum

Okay. Well Don to quote you, you said that the next three quarters feel like last year just as a reminder, those were there great quarters so, we would love to see that again.

Donald Muir

It’s a tough comparison certainly in the second-half to overcome this year and so, as Rory say we got quick momentum building in Q2 we expect affirming in the second-half and probably be a little a bit versus what we see in Q2 on a quarterly basis and Qs four and four. So we feel very good. We have great visibility in the second quarter and as we have mentioned in later potion of the call we are comfortable with the consensus revenue numbers that are relatively right now in quarters two to four. So they are good.

George Sutton – Craig Hallum

Lastly, we have talked about the vendor consolidation trend. I’m just curious, if you could give us a quick update there. Obviously that’s been a powerful factor for you for a while and wanted to make sure that is continuing.

Rory Cowan

Yeah, it came as of it is in most of these are bake offs are work coming out on top largely because of our platform being platform agnostic meaning we don’t have a tools set that we selling so, people feel comfortable outsourcing to us for a language. So that’s one thing that’s important. Second issue is I think our efficiencies and reliability are really becoming known.

We see the large life sciences companies beginning to consolidate and go through that process. The only downside sometimes is George if big software company A buys small software company B they may pull that into their internal operations and so even though those that have committed to outsourcing we are doing well with but remember there are still about half of the customers that do a lot of internally and that’s really hard to dislodge.

George Sutton – Craig Hallum

Okay, thank you.

Rory Cowan

Thanks, George.


Thank you, sir. The next question coming from the line of Kevin Liu. Your line is open sir.

Kevin Liu – B Riley

Good morning. Just pertaining to some of the new wins that you have was curious, is that driving much of the incremental revenues you expect to see here in the second quarter and if so I’m just wondering what the flow through looks like on those new revenues?

Rory Cowan

Yeah, remember we saw we see these new wins are of great diversity Kevin so, we have announced a number of wins from last year as diverse as Renault, the car people, Bosch the appliance people, [Inroe] which is a Spanish sort of significant financial institution, Ford, VMware so, some of the big, big guys and then we are also seeing this onDemand model which I have been actually quite surprised at the firmness for this transaction activity and that’s really starting because of we build up an inbound an in house sort of telemarketing or phone sales organization all that’s really beginning to drive more people to adopt our platform.

So it’s like great diversity of demand here but I do want to caution the wins I have mentioned are ramping, some of things that we have one, it is really customers will commit to ramp in six weeks and it might be three months before they actually have all their internal systems optimized to work with our platform. So that’s the only volatility that I worry about it it’s time to ramp from these wins.

Kevin Liu – B Riley

Understood and just with respect getting to the $8 million to $10 million in onDemand revenues this year. Wondering if you already all the infrastructure in place for that work or you expect to further make future investments in that line of business?

Rory Cowan

That’s a great question remember the onDemand platform really has two components to its infrastructure. The first is what we have built over many years here that’s our internal file routing work flow linguistic quality activity, cloud management, program management final test engineering and build, all of that capability. The infrastructure we build for onDemand is really quite different in that it’s more around the eCommerce portion of it. It’s more about productization because this means that someone will drag and drop some content and put it in one of the pre-existing work flows and so they don’t have the full bespoke customization capacity for these small projects. So it had to invest pretty heavily to develop that capability.

And the next category I mentioned, is this whole idea of connectors APIs machine-to-machine getting systems talking so you know developing the capability to build APIs and some customers want their own sand box to do that and other customers want outsource to us to build for these connectors. So that’s really where the next leg of investments is coming for the stuff, Kevin.

Kevin Liu – B Riley

Got it. And just one last one on the onDemand customers you mentioned about 1,500, 1,400 hundreds of customers transacting the online channel. Curious, if those were existing relationships already and if not whether you have the opportunity to sign them up as more of the large enterprise customers?

Rory Cowan

That’s you are getting one of the – our contentious is too strong a word but one of the discussion that have a lot of energy and that might sort of team meeting here because not only is the telemarketing group for onDemand or onDemand acting as you point out revenue source but then it’s also lead gen foyer for sales for other parts of the organization. You can argue it both ways that you have a small relationship but then you can get to their centralized group. What we are finding in many cases though is these are parallel realities. People that have all these small projects they have a need to do due diligence around an acquisition.

It’s the CEO’s message to the European employee base it’s a video for our product release in our micro site, these are episodic sort of rush projects, very different on the plan that goes around a three to six month global product release activity. So while there may be some crossover so far we are not finding as much as we might expect but its early days yet. So we’ll away from walk way but you are – that there is a lot energy around how to organize in our mind these relationships inside the company now.

Kevin Liu – B Riley

Great, thanks for taking the questions.

Rory Cowan

Great, thanks Kevin.


Thank you, sir. The next question is coming from the line of [Randy Hogan]. Your line is open sir.

Unidentified Analyst

Thanks. I had another follow-up on the onDemand platform. You said that you are seeing kind of a different form of demand coming from that channel. Do you think that there is any shift from any existing contract into the onDemand channel? Or do you think that all the revenue there is going to be incremental?

Rory Cowan

Yeah, all I think these are parallel realities. This is the transactional translation, these all the one-offs what we were surprised by is that not so surprised I shouldn’t say this shared services by their definition are optimized for large programs and projects that have long lead times and they are generally enterprise critical.

The transaction translation is what I call leakage it’s all the small stuff that everybody in the organization needs that the shared service team is really not optimized to handle a three day $10,000 project and so, there has been the General Counsel department has been buying translation they – marketing department has been buying translation, the Corporate Communication department has been buying translation, the controllers department when they are deploying SAP they have been buying translation for policies and procedures.

So, it’s really everywhere in the organization that we are seeing right now so, we don’t think it’s cannibalization at all.

Unidentified Analyst

Great, thanks.

Rory Cowan

Right, thank you.


Thank you, sir. At this time I don’t have any questions on cue, thank you. (Operator Instructions).

Rory Cowan

Thanks everyone. If you have any questions Sara know where to find Don and me. So please give her a call and thanks for your attention and look forward to seeing you at some conferences or at the next quarters call. Thanks a lot.


Thank you speakers to today’s conference. Thank you all for joining. You may now disconnect.

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 All other use is prohibited.


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

Source: Lionbridge Technologies' (LIOX) CEO Rory Cowan on Q1 2014 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts