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Executives

Sara Buda – VP, IR

Rory Cowan – Chairman, President and CEO

Don Muir – SVP and CFO

Analysts

Joseph Vafi – Jefferies & Co

Rich Baldry – Signal Hill Capital

Richard Davis – Canaccord

Kevin Liu – B. Riley & Company

Vincent Colicchio – Noble Financials

Lionbridge Technologies, Inc. (LIOX) Q3 2010 Earnings Conference Call November 4, 2010 9:00 AM ET

Operator

Welcome and thank you for standing by. At this time, all participants are in a listen-only mode. (Operator Instructions).

This call is being recorded. If you have any objections you may disconnect at this time.

Now I’ll turn the meeting over to Sara Buda, Vice President, Investor Relations. You may begin.

Sara Buda

Hi. Thank you everybody. Welcome to the Lionbridge investor call to discuss financial results for the third quarter of 2010. During this call, we may make certain statements that may be considered forward-looking statements under Federal Securities laws and which involve risks and uncertainties.

Our actual future results may differ significantly from the matters discussed in any forward-looking statements. We’ve disclosed in greater detail in our Form 10-K filed with the Securities and Exchange Commission on March 13th, 2010 the factors that may cause such differences.

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

Rory Cowan

Great. Thank you, Sara, and good morning, everyone. As is normal, today I’ll begin with the summary of our third quarter, I assume many of you have seen the release. Then I’ll provide some perspective on our current demand environment and our plans for accelerating revenue in 2011.

But first let’s talk a little about the quarter. Revenue was just over $99 million, $99.2 million, within the range we provided you in the last call, and this is reflective of our traditional Q3 seasonality. But there’s also some additional lower Microsoft revenue this quarter which we’ll talk about throughout the call today.

Gross profit was about 32% at 31.9% which significantly is about 80 basis points higher than last year at Q3, and it’s clear that we’re just have much more efficient cost model today all the work that we did in the past 18 months is beginning to come through, so we are lowering, our breakeven points are lowering our expense thresholds.

We’re just running a better business than we were 12 months ago, so this really provides a better platform as to accelerate profits as our revenue continues to grow.

(Inaudible) continuing to reduce our costs, you saw that we had about $4 million of restructuring expenses this quarter, and this is a bit higher than our past quarters. We’re in the process of closing one of our European offices and shrinking a number of other locales.

With a 12-month or so payback there is still more costs to come out of this business and very simply as we moved to the Cloud and offshore, we’re just doing more with less real estate, less fixed expense, and this is renewing the end of our previously announced $18 million restructuring that we announced last year.

Excluding these restructuring expenses, we are slightly positive on a GAAP basis. We had another quarter of positive cash flow from operations even after continuing, and actually in some cases accelerating investment in our software products and strategy. In fact this has been our sixth quarter of positive cash flow, sixth consecutive quarter. We continue to be net cash positive of almost $30 million in cash, and less than $25 million in debt.

And speaking of our debt, Don and his team have refinanced our revolving credit facility well in advance of its maturity this quarter, and the new terms are much more flexible and very favorable, which really reflects the underlying strength of our business and how well we managed in the bank size during the downturn last year. So sum Q3 was a pretty solid quarter.

Don will give you more details on the financial results by segment, but let me touch on our customer environment first. During the past few quarters we’ve ramped a number of large new accounts such as Genzyme, Caterpillar, Dell and Rolls-Royce, each of these is now a multimillion dollar recurring revenue customer, and they’ve been emphasizing as you can see the non tech space to get out of maybe some of this product cycle volatility that seems to be so common in the tech world.

We know how to manage complex little programs and the market leading organizations continue to rely on Lionbridge for their most critical products and content.

We expect a similar wrap for our new wins this quarter, which should roll into multimillion dollar clients during the coming year. With this new momentum and expected growth in existing accounts are building a very solid platform for 2011.

In the short term, however, as we look forward to, look ahead to Q4 and Q1, it’s clear that our recent client wins and strong pipeline of new business are really just offsetting a down release cycle from some of our major customers specifically Microsoft. Last week our largest customer Microsoft, as you saw, reported a very strong quarter of sales growth from new product releases.

We tend to get the product related activity three to six months ahead of the public release, which really correlates for a strong first half. In fact, for the second half of this year it looks our Microsoft revenue could be down, I don’t know 15%, 18% or something from the first half. We’re clearly offsetting this release cycle, their release cycle with new business. In fact, we have over a 150 individual requisitioners with inside of Microsoft, over about 27 of individual business units throughout the organization. So it’s a very deep and pervasive relationship.

So in the process of planning for the next Microsoft release cycle over the next several quarters and expect to rebound as this happened during early-to-mid 2011.

Our relationship remains very strong. In fact we are once again a finalist for Microsoft’s Vendor of the Year program, and you may remember there are tens of thousands of vendors who Microsoft assesses and scores in their performance. We didn’t win, but being one of the top finalists, we won last year of course, and being one of the finalists I really think it really underscores our deep relationship with them.

In the short term, their pipeline of new product and content releases just seems spaced a little further out than we’ve seen before, and there’s just more time between these release cycles. In fact it feels if a lot of tech companies are just managing cost by maybe stretching out their upgrades, all that startup cost with releasing a new product cycle or perhaps with all the acquisitions going on, people are a little bit more focused on integration than upgrades.

In addition for revenue, Europe is really A Tale of Two Cities, that’s what it reflects. Our experience reflects what you’re reading in the papers. Economies like Germany are seeing a very clear and strong rebound. I was with our sales team there a couple of weeks ago and I have not seen such confidence in Germany in years, sharp contrast with Spain, Ireland and France. They just don’t seem to have their mojo back in those countries.

On the other hand, China remains very strong for us. In fact we saw a 30% increase in demand for Chinese compared to last year, so it seems that the export markets, European and American companies exporting to China, but that really seems to be getting some strength.

Eastern Europe is also growing nicely. So we have a view of global demand that I think a lot of companies don’t have, a relatively firm demand from non tech exporters in the US, Germany is very strong, France, Ireland, Spain continue to be weak, and a lot of demand for China.

So let’s talk about what we’re doing for next year to accelerate our revenue growth. First, we’re ramping our sales teams to accelerate the growth. I have been talking about this for a while and you’re beginning to see it coming through the numbers. We decided to increase our spend in the sales and marketing line. And given that it takes about nine months to get a salesman up and spinning and about a nine-month closed cycle that’s about right, because we’ve been upgrading our sales force during the past few quarters.

So for 2011, we’re reiterating our 5% to 10% revenue growth, and this stems from really three specific revenue oriented actions.

First, our sale force reconfiguration. We’re adopting our sales strategy to capitalize the demand from large enterprises for integrated offerings that span all of our services from development, to testing, to translation.

And finally, after many years, it’s clear that clients are now ready for this integrated or horizontal one-stop shop for products and content. We have a number of proposals out that integrate all of our services.

This has also always been our strength, but customers used to unbundle our services, and now people are realizing the cost savings by integrating them.

So we now have a select enterprise sales teams that will sell these fairly complex integrated solutions, and this should drive bigger deals with longer term relationships.

The second action that we’re doing to accelerate revenues is really we want to shorten the time to close for new opportunities. Given that these are more complex opportunities they’re sort of sales engineering a solutions architect whatever you want, however you want to call it, but it’s a lot more complicated. So we have established what we call a deal desk which is a unique team dedicated to putting the right operational and sales teams together for each unique opportunity. We have 30 offices in about 25 countries, and it’s a very complicated global decision-making unit. So getting all of our customers’ global needs together aligned with our global capabilities, only for these larger opportunities, that’s really our second action.

The final action we’re taking is really accelerating the integration and use of our Cloud based technology offerings. Over the past several years, we’ve continued to invest in our technology, but even during the downturn, I did not cut R&D, but this investment is paying off. We now have two related software-as-a-service or SaaS offerings. First, of course translation work space which is the productivity technology for translators and agencies. And the second is Custom Real-Time Translation or CRT, the automated translation technology for enterprises, which is based on our partnership and direct development agreement with IBM.

So today we’re beginning to see strong market traction for both. In fact translation workspace now has over 2,000 monthly subscribers in over 80 countries in just its first few months, and this is before we begin to release this upstream to large enterprises, and we have a couple of betas going on with large enterprise applications as well. And the real-time translation offering from IBM or CRT also has several market leading companies as beta customers, and truly a couple of dozen others are waiting for general availability as we wanted to narrow our betas until they get the release and support capabilities well homed.

These offerings not only expand our market, but the high profitable SaaS based revenue as many of you’ve been asking about, but we’re also finding that we’re seeing new opportunities for traditional translation services coming out of our technology offering. It’s seems that the technology deepens the relationship and then the services, the maintenance of that content begins to grow as well. So you can see the benefit of adding this innovative SaaS products to our well established service offerings. And as we said, we expect the sort of $5 million to $10 million run rate for our SaaS products as we leave 2011 with much more upside in 2012 as you all know how SaaS revenues models into recognized revenue.

So in summary, we’re well positioned for 2011. Demand remains firm, but as I mentioned, it’s geographically uneven. We’re offsetting product release cycles from existing clients with new business. We’re configuring ourselves to aims to capitalize on large integrated opportunities and we have the industry’s most advanced SaaS technology offerings that have really given us a competitive advantage.

Now, I’ll turn the call over to Don, and he can give you the playback play on the quarter.

Don Muir

Thanks Rory, and hello, everyone. Today, I’ll provide a financial overview of our second quarter, our third quarter I should say, and then I’ll give you an outlook for Q4 and 2011.

Revenue for the quarter was $99.2 million, in line with the guidance we provided. This is up 1% or above 4% in constant currency year-on-year. Sequentially, the quarter is down about 5%, driven primarily by two factors, traditional Q3 seasonality and lower than expected Microsoft revenue.

For the first nine months of the year, revenue was $305 million, representing growth of over $20 million or 7%, and up about 8% in constant currency. Gross margin for the total company was 31.9%, which is about 80 basis points higher than last year’s third quarter. On a segment reporting basis, gross margins in our GLP language business grew 170 basis points year-on-year to about 33% in the quarter. This primarily reflects our ongoing cost management as well as a favorable year-over-year currency impact.

Gross margins in our GDT developed and testing business decreased year-on-year to about 32% for the quarter. This reflects work mix changes with an increase in US-based revenue from HP. Total operating expenses ex-restructuring grew year-on-year primarily due to higher sales and marketing. This reflects our increased focus on accelerating revenue for 2011. G&A was flat year-on-year. Compared to last quarter, operating expense was roughly flat sequentially. We offset increases in sales and marketing expenses with lower G&A. In fact, G&A is lower by about 4% compared to last quarter. So we are cutting where we should G&A and investing where we should sales and marketing to accelerate growth.

Going forward, we expect sales and marketing to continue to run at about 8% of revenue. G&A should trend down as a percentage of revenue going forward, as we continue to manage costs while growing the top line. As Rory mentioned, we had about $4 million of restructuring in the quarter. We’re in the process of closing one of our European locations and reducing overheads in others. While we had a much linear costs model today there are still opportunities to reduce costs. This position does well to grow earnings in 2011 as revenue momentum builds.

As you look below the line at the operating profit, you’ll see that Q3 other expense was $1.6 million driven by unfavorable currency related balance sheet revaluations as the dollar weakened by approximately 10% versus the Euro.

During the quarter, we saw this exchange rate go from a $1.22 to a $1.36. Year-to-date other expense totaled $2.1 million or about $400,000 per quarter on average. So as we’ve said in past calls, we have models going forward, we expect our other expense line item to be plus or minus $500,000 per quarter, depending on FX volatility.

Our tax provision for the quarter was actually about a $300,000 benefit. This benefit resulted in the favorable impact of several international tax adjustments recorded in the third quarter. As we’ve said, for the next few quarters, we expect a quarterly tax provision of about $500,000 to a $1 million a quarter. And longer term, the tax provision should be in the low-to-mid 20s as a percentage of pretax income.

On a GAAP basis, we had a loss of $0.07, excluding third quarter restructuring expense we were about breakeven for the quarter. Non-GAAP earnings were $2.4 million or $0.04 a share, about flat with last year.

Moving to the balance sheet, we had another quarter of generating positive cash flow from operations. We generated about $800,000 during the third quarter, which is essentially flat versus last year. We’ve kept global DSOs under 50 days, and we ended the quarter with about $30 million in cash, even after accelerating our technology investments in the first half of the year.

Debt remained at $24.7 million, so we’re net cash positive again by about $5 million. And our balance sheet remains strong. In fact, we recently renewed and extended our revolving credit facility for four years. It wasn’t set to expire until last year, but we decided to be proactive to take advantage of today’s rates. And given our strong performance during the downturn, the banks gave us a very favorable term, including low borrowing cost at about 2% of a monthly LIBOR and improved covenant flexibility around restructure, capital spending, and hedging costs.

This amended credit line will enable us to further mitigate currency exposure, impacting the other expense line in the P&L favorably, and it will allow us to invest appropriately and prudently to grow the business long term. We are able to secure this favorable bank line based on the underlying strength of our business. So, I am quite pleased with the results of this process.

In terms of uses of cash, as we said, we use our cash to fund restructuring and invest in our translation technology development. And longer term, we may look at select acquisitions that enhance our business in terms of vertical markets, or technology. So our cash management strategy remains aligned with our overall objectives of accelerating revenue and market leadership while reducing our costs.

So, in summary, Q3 was a solid quarter. Revenue was in the range of our expectations. Gross margins improved year-on-year. Net income, ex-restructuring, was positive. And we continue to generate cash. On the business side, we had a number of positive developments in the quarter, including market momentum with our new real-time translation technology with IBM, and new wins in our language and developments segments.

As we look ahead to our fourth quarter and Q1 2011 outlook, there are two short-term factors to consider. Slower product releases from technology clients like Microsoft and pockets of weakness in certain parts of Europe, as we already mentioned. We are mitigating these headwinds with new business.

On our last call, we told you that we expected to be at the low end of our 5% to 10% revenue growth rate range for 2010. Given our second half Microsoft revenue level, we now expect to be up about 4% for this year. This would be about 6% year-on-year growth in constant currency.

Our Q4 revenue range is $98 million to $102 million and as we look ahead to Q1 2011, we expect to be about flat with Q4 depending on the timing of client projects. As we said, we are the partner of choice for all of our major clients. More than half of these business comes from outside the US. We know we will get the revenue when they develop products and content. It’s just a matter of when we get their activity, not if.

So we expect revenue momentum to build starting in Q2 and throughout the rest of 2011. As we already mentioned, for 2011 we are reiterating our annual growth estimate of 5% to 10% with the understanding that this will likely be a second half biased growth.

So in summary, I am pleased with our first nine months to-date performance. Year-to-date revenue growth of 7% is solid. In the second half of the year, we are executing well in the midst of a slower release cycle from our top customer, and I feel we are well positioned to accelerate revenue and earnings growth for 2011.

Back to you, Rory.

Rory Cowan

Thanks Don. So just to reiterate what Don was saying before we open the call up for questions; we are continuing to take that overhead cost while investing in sales and technology.

We expect to continue this sort of approximately 40% conversion of incremental revenue to operating profit in 2011 because that’s the model we’ve proven once you had revenue on the top, we get great conversion on the revenue. And that’s despite our increased investments in technology. We delivered a strong conversion in the first half of ‘10 and we expect to do it again in ‘11. So it’s really a revenue story among the text is the way to think about it.

We are offsetting these uneven release cycles with our top clients’ new multi-million dollar relationships from the non-techs. We have solid plan for sales expansion that really capitalizes on the strengthening demand for integrated offerings.

We are accelerating our technology investments and will be beefing up our sales activities there during Q1 as well, and well expanding on broader market opportunities. If the sales growth combines with these cost actions, I think you will begin to see a nice financial performance going forward. So, within this context, I feel like positive about 2011 on our ongoing growth for the company.

And so now, let’s open the call up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question does come from Joseph Vafi, Jefferies & Co.

Joseph Vafi – Jefferies & Co

Hi good morning. I thought maybe we could talk a little bit more about the accelerated restructuring here in Q3 and what it might mean for G&A costs next year. I know you gave us some color there on what you think, you know, the operating costs are going to be moving forward. But does this indeed accelerate potential, you know, margin expansion with reduced G&A costs?

Rory Cowan

Yes, I think so. I’ll start and then hand it over to Don. I think, clearly as you know, we had two things going on in Europe. The first one was it just takes a little bit longer to work through these works councils, and the second one is our bank line somewhat limited the amount that we could spend on restructuring, Joe. So we cleared both of those now.

And as we said, these things, I don’t want to say it’s dollar for dollar within 12 months, but it’s dollar enclosed in terms of the pay back. So, I think you should see some significant reduction of G&A. But also this restructuring flows through our entire statement.

You get some of it in our cost of goods sold line, because lot of (PMs) in Europe are in the cost of goods sold line, that’s our i-cost or internal cost of sales, as well as traditional G&A activities from leases, from finance, IT and other things that are embedded in the statements. So, we are feeling pretty positive about this first step. And with our technology getting traction, we see even more opportunity for Q1 and Q2. It’s really quite heartening.

Don Muir

Yes, hi Joe this is Don. I think as we indicated last quarter, we said we expected to see, you know, $4 million to $6 million of restructuring over the next two to four quarters. So I think we are being pretty consistent, may be a little early. But as Rory said, the catalyst here was the new credit facility. That did give us some relief on our ability to take restructuring charges and not include them in some of the bank covenants.

Over the next couple of quarters, we expect another probably $2 million to $3 million of restructuring expenses. And based on where these are in Western Europe, we are looking at probably 12-18 month pay backs, some of these, these are may be a little bit longer pay back than some of the initial restructuring we had taken…

Rory Cowan

Cash pay back versus.

Don Muir

Right.

Joseph Vafi – Jefferies & Co

Okay, that’s helpful. And then I guess here on the real-time translation product, thanks for the additional color here. Do we really – so we feel we can have general availability release here in early 2011. That looks – would that be a Q1 event do you think at this point?

Rory Cowan

I think so Joe. Q1 should look – we’re probably having – we’ll have two betas in production by the end of Q4. We are working now on the customization capability. Just to remind you the unique nature of this product is we are able to take this very algorithm heavy technology and customize it both for a particular customer’s content, but also for their unique language pairs, and then configure it for the application, meaning real-time chat and technical support or real-time website translation. And so, really it’s the customization and configuration process that’s holding up other deployment. That’s going very well with IBM. As you can imagine, it took us maybe a month or so just to figure out how to get these two companies to work together, and now the codes are flowing freely between the two of us, and so we’re pretty excited about it.

So we should begin to see some reasonable revenue in Q1, Q2.

Joseph Vafi – Jefferies & Co

Okay. And I mean I know you’ve thrown some numbers out before and what maybe “SaaS” based services and software maybe in 2011. How is that factored into that top line guidance you gave us here for a fiscal ‘11?

Rory Cowan

It’s pretty broad, because we know we have a good sense of what’s going on in translation workspace, which is the offering created for the individual translators and the agencies around the world, that’s going to wrap nicely. That as we said we have about 2,000 users now or probably next year, at the end of the year we’ll have 3,3500 users that’s going well. And then the enterprise side of that, it could be anywhere – each sale to be anywhere from a $100,000 to $400,000, $500,000, that’s on translation workspace.

For the CRT or the automated translation offering, we’re sort of penciling out also anything from a $100,000 to $1 million, depending up on language pairs and applications. We think we’ll end the year at that $5 million to $10 million of SaaS run rate or maybe better than that, but I really want to get some traction on this, because these things always take longer than you think they’re going to.

Joseph Vafi – Jefferies & Co

Okay, that’s helpful. And then, I guess, is there anything else going on with any of the other big tech customers other than Microsoft that we should be aware of in terms of fluctuations in volumes?

Rory Cowan

I think that we’ve won a couple of new techs. It’s been a fair amount of vendor consolidation and I think that what I see is that during the downturn, all the techs begin to manage cost and they’re all enthusiastic about consolidating. Then as business picks up a little bit, the cost focus tends to soften.

We have picked up a number of strong checked companies this quarter that in more web based activity, which tend to have a little bit more stability around it, some e-commerce stores and some other things. In fact, HP has been particularly strong with multiyear relationships with us and that maybe just herds cost orientation after two or three years is working through the whole culture there. Google has also been and continues to be very strong and stable for us.

As I mentioned, some of the other techs like, last year you may recall we had a strong performance with Canon and with Oracle, and I think we’ve seen some cycle changes there, as I said, Oracle seems to be doing more acquisition and consolidation of existing rather than upgrading at least the products we’re exposed to. So I think what I’m disappointed by of course is that the techs have these big cycles. What I’m delighted by is that our sales force is really picking up the slack during the downturn on these.

Rory Cowan

Okay.

Operator

The next question comes from the Rich Baldry, Signal Hill Capital.

Rich Baldry – Signal Hill Capital

Thanks. Could you talk a little bit the linearity of this visibility, it doesn’t seem like it’s coming out of Q2, you are talking with top 10 customers of 10% year-on-year and the confidence they had in sort of second half cycle, so it seems like something may have changed. Do you feel like that was a late change in the summer time or something else? And then in the sales and marketing side, can you talk about the increased spending whether that’ll be in sort of the newer translation Custom Real-Time kind of areas or if it’ll be kind of balanced across your offerings? Thanks.

Rory Cowan

Yes, I think so. I think a couple of things here. First, the real focus as you mentioned, you’re right to point out the – what do we know and when do we know it kind of issue, when did it work its way through, which is – this is really a sort of a July-August kind of thing that worked its way through, particularly with our Microsoft account. As you know, Balmer has been reorienting spend there quite rapidly away from a lot of the more mature products and putting it in to a lot of their growth opportunities. That happened fairly abruptly with cost management this summer as they entered their new fiscal. So we’re engaged with some of the newer players, but those products of scale are just aren’t coming through to the market yet. And as I mentioned – Microsoft maybe down as much as 10% to 15% for us during half two versus half one and that is quite a – we expected some softness but not cracking double digits. So I think that’s the first one there.

Secondly, where is the spend – where is the sales spend going? It’s really going across all areas, Rich. We see – we’re beefing up our sales and our traditional services groups and we’re now building a separate sales force for our technology products. So those are the two tasks over the next four to six months that we’re working on.

Rich Baldry – Signal Hill Capital

And in the release you talked about general availability of the real-time platform in early 2011. So does that mean we’ll literally should start seeing revenues at the time it goes GA or is there more of a lagged effect, where beta customers allowed are kind of attracted by giving them some terms that maybe we won’t see their revenue until later. How do we think about that?

Rory Cowan

Yes, I think that’s right. We do have a couple of these – some of these betas are fake betas on the real-time activity, and the goal of course is to prove the technology and then convert those into broader enterprise deployments. So I wouldn’t expect to see a step curve from Q1 to Q2, but I would expect it to build throughout the year. That’s on the RTTSPs. We’re already seeing that as I mentioned with our translation workspace which is for the agencies and translators, and that too is building really very nicely on a weekly basis throughout the year. So I think it’s going to build throughout the year, Rich.

Rich Baldry – Signal Hill Capital

Thanks.

Operator

The next question comes from Richard Davis, Canaccord.

Richard Davis – Canaccord

Hi, thanks very much. So I realized we’re still in the very early days, but what I’m trying to figure out is how scalable into perhaps other professions workspace could be. So the question I have for you is this is, is your competitive advantage in this effort at this moment the reputation and kind of market presence you have with this pool of people or is there something else with regard to the software that you view as proprietary and/or unique, so that in the future – now this again will probably be not till 2012 or something – but in the future when you try to, if assuming try to expand into other areas you can take it there? So that’s really the kind of picture question I have for you.

Rory Cowan

That’s correct, Rich, and you’re right to ask about that, because those are – we haven’t been emphasizing the nature of our professional crowd here. Just to remind everybody, we’ve been focusing in this call mostly on translation workspace which is individual translators. We also maintain a community of paid professionals in about 90 countries that do web rating or URL rating as well. And so we’re applying this capability to recruit, test, and pay people in about 80 countries from the Cloud. We’ve been focusing on the translation business here, but we’re beginning to see a significant acceleration of other applications for this crowd management capability. So, for example, we’re doing some regulatory management.

Accounting laws are changing frequently in all the countries around the world, so people that maintain accounting software need people to monitor this activity. We’re now hiring professionals in all these countries to monitor regulatory changes and feed it back to the product configuration folks at some of these tech companies. Big application force, that’s the crowd that Rich asked about. Now the unique technology in applying it is also correct. Because we are now able to pay people and we know all of the labor laws and regulations for temporary and contract workers in about 80 countries or translators for our raters, for our content monitors, we’re building that knowledge into the platform. We’re receiving about a 100,000 inbounds a year now of people looking for work on the web around the world, so this is becoming a very powerful and unique capability. So we’re excited about that.

I first am focusing right now on getting the translation workspace in the IBM relationship done, then in the second half of the year, we’ll start targeting and moving this capability into other applications.

Richard Davis – Canaccord

So is it fair to think about this in some respects is almost a, I don’t know, derivative or second generation. It’s almost as if the data collection you’re doing is to some degree like Open Source which is the theory behind that everyone contributes a little bit to a greater good and particularly with regard to the regulatory changes and things like that or crowd sourcing which I guess is a current phrase too. But is that the right way to think of this business?

Rory Cowan

You could think of it that way, but I’m looking to make a little more money out of it than just holding a party in the sky here. We have people that contract with us to find proprietary information that is needed for their unique product, so another application we’re working on is geographic points of interest. To maintain all these maps worldwide you need people with local knowledge contributing to the Cloud. So rather than contributing that to an Open Source knowledge of where the construction sites are and what the hours are and what roads have been built and haven’t been built, individual platforms pay us handsomely for that data to enhance their particular product.

So it’s reducing their expenses quite dramatically, but this is an essential part of their competitiveness. So in the translation piece there is this Cloud based database but that is our customer’s content. We do not violate their copyrights, but we do detect patterns in that content to train the IBM software that we’ve worked with. So there are two different applications there Rich, contractual (inaudible) to our customers competitiveness, and then getting derivative data from a database in the Cloud in the sky.

Richard Davis – Canaccord

Perfect, thanks so much.

Operator

Your next question comes from Kevin Liu, B. Riley & Company.

Kevin Liu – B. Riley & Company

Hi, good morning. First question here – your guidance for Q4 here is fairly consistent from a revenue standpoint as the prior quarter. But looking at kind of the impacts on margins, one you guys have accelerated restructuring, so would expect maybe some initial benefits there. But beyond that, Forex seems to be working against you at least for now on a sequential basis, and you guys have also sent out this memo requesting discounts from your translator base. I’m – so curious as to your confidence in extracting these discounts and what sort of net impact you expect on the margin line on a sequential basis?

Rory Cowan

Right, I’ll handle some of this and then Don’s going to respond to it. First, I think two things – let’s take this in reverse order. We have gone out for a worldwide translator database and asked for discounts. And the reason for that is is we’re finding that – what’s happening it seems to be with workers in the Cloud right now is there’s quite a lot of fraud in a lot of these worked – these meeting places and job posting places where small businesses post projects and individual respond to them, it seems if there is a not a lot of follow through on payment.

One of the things that we do is, of course, we’re a very high integrity and do pay people, first. Second, we’re finding the translators we’re getting great productivity with our platform. And so, I think that we should be able to share some of that productivity – share the benefits of that productivity with them.

So this is – I think – will we get 5% everybody? That’s probably a little aggressive, but it’s certainly a nice place to start. And we’re also finding that new translators are now coming to us, because they find that there are many more translators than they are companies with high integrity buying translation on the web. So I think that’s the first one. Don anything on that?

Don Muir

I think to your question, Kevin, on the FX impact, certainly that the Euro has strengthened here, but we saw a year-over-year basis to Q3, almost an identical swing where you had a very strong year over last year compared to this year, and that really had a de minimis effect on our margins.

So we’re almost perfectly cached with the gross margin line, the impact on revenue kind of offsets the impact on the cost of revenue, and we see a little bit of noise in the operating expense line. But again on a year-over-year basis, on a 10% move, it was about 250k, so not a huge impact.

Analyst

Yes, I mean, I guess I was looking more just sequentially to see if you would be able to maintain the operating margin you posted for Q3.

Don Muir

Yes, I don’t think that’s actually is going to be the reason that we missed that.

Rory Cowan

And also our new bank line gives a little bit more flexibility with some very light hedging. Now, we thought we all focus on the Euro, dollar, but the currency markets worldwide are really unbelievably volatile.

The Euro-Yen relation, RMB, it’s become a much more complicated operating environment and our treasury group has got an increasingly sophisticated – and our bank line gives us a much more flexibility now to really act on it.

Don Muir

Yes, and as I said in my portion of the call, you got to see that in the other expense line. That’s not going to be your operating profit, the actions that we take on hedging or treasury.

Analyst

Got it. And then, the other question I had was just on these integrated fields that you were talking about, you mentioned you were out there that some customers are ready. So just wondering when some of the big decisions around these are going to be made.

Rory Cowan

Yes, I think a couple of things. We’ve already seen some of these. In fact, we built a – for one customer, we built a dedicated R&D center, a dedicated development localization center in center for them, and so already beginning to see this integration of testing development and language, and so that’s one that you’ll begin to see really hitting its stride in next year. So we should begin to see, we’re getting early stages on some of them, we’ve already won.

And as I think I mentioned to you, I brought in some new management in our GDT group, our development and test group, and that’s largely based on the need to develop some unique cross selling capabilities. One other trend and I think it’s early days yet, but I think we’re finding that perhaps the Indian outsources do not have the command of localization and culture management that perhaps we do. And some projects of two years that went to India seem to be coming back to our global Cloud.

Analyst

That’s great. Thanks for taking my question.

Operator

(Operator Instructions). The next question comes from Vincent Colicchio, Noble Financials.

Vincent Colicchio – Noble Financials

Can you – Rory, can you provide an update on sales cycles and pricing trends on the translation side?

Rory Cowan

Yes, great, sales cycles and pricing trends on the translational side was the question. First, sales cycles posed [ph] some action for the larger clients it’s still a six to nine-month cycle when – from when you first knock on the door to when you really have a contract completed, so that hasn’t changed.

On the smaller customers, it’s still a little bit shorter, that might be a six to 10-week kind of process or months to two-month kind of process, so that hasn’t changed at all. Pricing is all over of the map. Seriously, the smaller customers focus more on pennies per word, the larger customers focus more on time to market, because they realize the leverage saving $200,000 on a translation job rather than being six weeks late to market is probably a pretty core tradeoff.

So we’re finding that our larger customers actually appreciate our value, our reliability, our technology, and just our general ability to work with them as they change at the last moments. Smaller customers are probably aren’t as sophisticated their procurement process.

Vincent Colicchio – Noble Financials

It sounds like you’ve added non-tech clients and you’re also ramping up some tech clients. Could you give us some color in terms of what extent you’re relying on tech versus non tech to offset the slowdown at Microsoft?

Rory Cowan

Yes, tech has large been a slowdown at Microsoft, and I really want to emphasize. We’ve been here with Microsoft before, this is just a normal effect. I think if anything from a positive standpoint is Microsoft is really integrating their worldwide release cycle, it’s taken them four, five years to get everything around a real large sun wave.

As you know the problem with the complexity of a place like Microsoft is each unit was releasing products according with their own cycle and business needs and they were often out of sync, and therefore, end users were constantly dealing about the – with interoperability issues when they would upgrade their software. So Microsoft is getting everything in line and that maybe quite as a bigger pause this time than we’ve seen before.

Secondly, we’re focusing more and more on non techs, while techs is where there a lot of the content is, our technology, RTTS, and other many of the newer applications are outside of the product business within techs and in the non tech world. So I think if we – if we look at the end of 2011, we’ll have more revenue, greater percentage of our revenue from non techs than we do today.

Vincent Colicchio – Noble Financials

Okay, thanks guys.

Operator

At this time, I show no further question.

Rory Cowan

Great, thanks everyone. And again, if you have any other questions, please rid them through to Sara Buda. And Sara, Don, and I will be able to schedule some time to talk. Thanks, tough luck.

Operator

This does conclude today’s conference. Thank you for participating and you may disconnect at this time.

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