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Executives

Sara Buda – VP, IR

Rory Cowan – Chairman, President and CEO

Don Muir – SVP and CFO

Analysts

Richard Baldry – Signal Hill Capital

DJ – Canaccord

Kevin Liu – B. Riley & Company

Joseph Vafi – Jefferies & Co

Harvey Poppel - Poptech LP

Mark Cooper - Pacific Ridge

Vincent Colicchio – Noble Financials

Lionbridge Technologies (LIOX) Q4 2010 Earnings Call February 8, 2011 9:00 AM ET

Operator

Good morning, and thank you for standing by. [Operator Instructions.] I would now like to turn the call over to your host, Ms. Sara Buda, vice president of investor relations. Ma'am, you may begin.

Sara Buda

Terrific. Thank you. Welcome everybody to the Lionbridge investor call to discuss financial results for the fourth quarter and fiscal year 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 on March 13, 2010 with the Securities and Exchange Commission and subsequent filings.

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

Rory Cowan

Thanks Sara, and greetings here from Waltham on our third Tuesday snowstorm. Welcome everyone. We're delighted to have you here with us today as we review our year-end results and discuss our strategy for 2011.

First, 2010 really marked a number of financial achievements. For the full year, we delivered growth of about 4% in real dollars and about 6% in constant currency. And this includes a $2.7 million decline in Microsoft revenue due to their product release cycle shifts at the end of the year and in fact Microsoft in the second half was almost $9 million less compared to the first half of 2010. So if we really think about it, one of our numbers to see the health of the company is that our revenue growth ex-Microsoft in constant currency was about 7%, so the revenue generation programs are beginning to take hold. I'll talk a little bit more about Microsoft later in my comments.

Second, we grew net income both in terms of GAAP and adjusted earnings. In fact, net income for the year was about $6.5 million or $0.11 a share ex-restructuring and this is the highest annual net income in about six years for us, so we're continuing to make progress on that front as well.

The quality of the earnings continues to strengthen. If you look back over the years it's clear that we're driving more profit today despite our dampened revenue, and we're driving these profits after investing millions in our software business, our SAS business, which as you know takes a lot of cash and expense up front before it begins to power a GAAP earnings in the later years.

We've also shown that we know how to manage costs, and as a result there's powerful conversion with incremental revenue growth, as you saw in the first half of 2010. So going forward, clearly our revenue is our focus.

As you can see in the second half of 2010, we started investing in sales and marketing, and in the past few weeks we've brought in a new SVP of marketing who's now part of our management team. We've also added a senior sales leader in our SAS products business. And this is in addition, of course, to the new GDT leadership of last year as well as a new technology leader that joined us about a year ago as well. So you can begin to see that we're investing in management and freshening the team as we enter this part of the economic cycle.

So people are buying again, and so it's time for us to start selling again, particularly as we accelerate the SAS offerings and bring real-time translation to market in the coming months. Lastly, Don will mention that we continue to generate cash and now that we're at a net positive cash position, we're comfortably investing in the business where we need to.

So a few milestones for the year. First, we brought our SAS product to market with the launch of Translation Workspace. In fact, we ended the year with about 2,300 external subscribers and we currently host about 3 billion words in one secure, multitenant platform in real time.

We've partnered with IBM to bring real time automated translation to market, and we've secured three beta agreements with prominent organizations, and that's moving right on schedule.

We haven't talked a lot about this, but we are scaling our GSS, which is our global sourcing and search business, into one of our fastest-growing offerings. We helped determine the relevance of more than 70% of the world's search results. And we are expanding that business to include other multilingual, in country knowledge offerings as well.

We secured new engagements with brand-name Fortune 500 organizations including Apple, Disney, CBS Interactive, Honeywell, Cisco, and General Motors, each of which should grow into multi-million dollar accounts over the coming years.

We've also expanded our GDT development and testing business with new multiyear contracts. We've reduced our overhead expenses, including the closure of our least efficient European locale during Q4. We've accelerated the profitability of our GLC language business with much stronger cost management and technology and process efficiencies. And finally, we're ramping our sales team to capitalize on the growing demand for services and technologies.

So our business and financial achievements for 2010 really should stand us in good stead for 2011. Don will walk you through more detail on Q4, but in short the quarter came in as we expected. Revenue was about $100 million, a slight increase over Q3. But of course a decrease year-on-year. Our non-Microsoft revenue continued to grow nicely. Gross margins were a little weaker, due to, of course, new program ramps from new customers, and we continued to manage cost as I mentioned.

Let me take a moment and talk about 2011 and the things we're working on and our priorities. First, clearly the world is coming alive again and so accelerating our revenue growth. As I mentioned in our last call, we've increased our investment in sales and marketing and you can see that in the statements. And this is beginning to pay off.

Pipeline is stronger than it has been in over a year, and this includes strong demand for our GLC language business as well as our GDT development and testing business. This pipeline stems from strength in two areas.

Clearly you either have to grow existing accounts or find new ones, so in minding our new accounts, there's several accounts in our top 10 where we have opportunities to expand what we'll call the "share of wallet." We saw some success in this area in 2010 with solid growth when we see the filings from clients like Google, HP, and Rolls Royce, the jet engine people.

This year we plan to expand those and other top accounts, particularly focusing on revenue campaigns that span our cross service offerings. So mining our new accounts. New business, clearly we're focusing on growth and we're seeing this outside of our top 10.

We have a reenergized sales team. They're layering in new vertical market expertise and we're beginning to raise the bar in terms of the caliber of sales people and a focus on securing bigger deals with multiyear terms. We've been making a number of changes and quite honestly shaking things up a little bit on the sales side, so we're starting to see the positive results. So I'm confident in the growth of 2011.

Let's talk about a topic we've all been talking about, which is really Microsoft and our visibility into new releases. Just to remind all of you, we have a master services agreement with Microsoft, and we work with over 100 individual decision makers across the enterprise. And annually we deliver about 200 individual programs and projects for them each year.

So the relationship is really quite broad and quite deep. In fact, we were just awarded several new programs from product groups that we've never serviced before, including some of their high-profile, well known applications. However, given the nature of this business, we're subject to the product release cycles as we're seeing during these couple of quarters.

Many of you asked about timing and visibility. For some of the smaller programs, we receive notification of projects as late as just 2 months ahead of their release to market. For some of their larger, more visible product releases, we can begin activity as far as 18 months before public release. So we're tightly aligned with Microsoft on their product roadmap.

And with that knowledge, we see a strong pipeline of releases, starting in the second half of Q2 and accelerating into half-two 2011 and early '12. So despite a planned slow start in Q1 with Microsoft, we're budgeting that account to grow for us year-on-year in 2011.

So in short, we have increasing clarity on our Microsoft revenue, and we're accelerating non-Microsoft revenue with new sales efforts and new, high-caliber hires. So that's it for revenue growth.

Before I turn it over to Don, I do want to talk about two other strategic areas. First, our human capital management programs, and then give you an update on our SAS technology offerings. First, in HCM, in today's release you'll see that I highlighted our GSS, or our global sourcing and search business. That's a professional crowd-sourcing business where we manage people around the world.

For those of you new to Lionbridge, this falls into our GDT segment in the public reporting areas. This is a service offering that initially centered on just providing search relevance testing, where we rate search results for companies like Google and for engines like Google and Bing to make sure they're relevant in local markets worldwide.

In '08 and '09, we invested pretty heavily and deployed SAP into this business about three years ago, and this offering now has steadily ramped to become one of our fastest growing and most profitable services. In fact, we now have access to about 100,000 pre-qualified, independent at-home professionals in nearly 5,000 cities in 102 countries. 100,000 pre-qualified, independent at-home workers. These are professionals. In almost 5,000 cities, 102 countries, that provide us in-country expertise and deep local knowledge.

We now know how to find, recruit, test, manage, and pay these independent workers from a single location, using one central technology backbone that is global in its reach. I think this is human capital management at its best, and really talks about the new nature of work, where many people want to work part time from home.

We're now expanding this service from just web search relevance ratings to increase to include other task-based in-country services such as regulatory compliance monitoring. We have customers that are asking us to read local legislation on things such as taxes, have professionals summarize that so it can be embedded into their products. Things like global keyword optimization. We've been doing a number of pilots that show our ability to really increase the level of search, increase the level of response, by optimizing keywords for individuals.

For clients, this is a crucial capability, because in one location they can optimize their global web applications. To reach consumers, their offerings have to be, of course, hyper-global as well as hyper-local, and the language has to be available, the terms have to be available, in all languages, but it has to be locally relevant to that particular consumer.

It feels as if we're becoming the experts in making this work on a global scale, so there are many growth opportunities here. It's a matter of really directing our focus and beginning to put our energy behind the services with the largest addressable markets, and this is the reason for some of the new senior leaders I've brought in recently.

You can expect to hear more from us on this area in 2011 as we integrate this professional crowdsourcing capability with the translation and other multilingual offerings. We're quickly becoming one of the world's largest providers of task-based multilingual services with a global, independent, at-home in-country workforce. This is global and local, all in one click.

Finally, let's talk about our SAS strategy. We're making significant progress on our two SAS offerings, Translation Workspace, which is the translation productivity tool, and Geofluent which is the real-time, automated translation platform.

For Translation Workspace, in 2011 we expect to extend our early successes with the translators and begin to offer the platform to both large agencies and enterprises who have a multi-vendor strategy. We have several enterprise opportunities and pilots in process right now, and again I've hired some very senior sales leaders to help us accelerate this opportunity.

We expect to convert these into revenue in the next few months, while at the same time we're adding new translator subscribers. So I'm pleased with the progress of Translation Workspace, and we expect that to continue to grow in 2011.

Geofluent is our real-time translation technology based on the IBM partnership. You may have seen that Cisco, Intel, and Symantec have chosen to become part of the Geofluent beta program. Each of these clients is using Geofluent for a different enterprise application. You can see the broad applicability for this technology from real-time multilingual chat for customer care, to partner websites, to user forums. So you can take what has been just a single-language application and now centralize that and scale it globally using this technology.

We continue to see a strong pipeline of Fortune 500 organizations who are looking to Geofluent to solve their need for "good enough" instantaneous translation of communications that are not currently translated. So we think it's going to expand our market opportunity.

We expect to go GA for this in Q2 and we expect to convert beta customers into SAS customers with the multiyear recurrent revenue as these databases must be maintained as customers' content evolves.

So between Translation Workspace and Geofluent, we expect to exit 2011 with an annualized run rate of about $5 million, but further acceleration into '12 as we ramp these customers and expand this offering into new accounts. As we enter 2012, you'll likely see these two offerings merge into one comprehensive language management technology platform.

As I close the first part of my comments here, our revenue pipeline is strengthening. We've got visibility with our top customer that indicates a solid ramp in late Q2 and further acceleration into the second half. Our traditional GLC language business is benefitting from cost actions, we're carving out new market opportunities that capitalize on our skills with human capital management on a global scale, and our SAS offerings are really coming to market.

So Don, I'll turn it over to you for the numbers.

Don Muir

Thanks Rory. Hello everyone. Today I'll walk you through a review of the quarter and the year. Let me start with the fourth quarter. Revenue was $100.4 million for the quarter, in line with what we expected.

This marks a sequential quarter increase of about $1.1 million from Q3 and a year-on-year decrease of about $4.6 million for the quarter. As Rory described earlier, the year-on-year decline primarily related to the short-term product cycle decrease in Microsoft revenue of $7.5 million from last year's Q4, or about 30%.

We were on the right side of product releases in Q4 last year. We're on the other side of those cycles this year. But, as we said, we expect to rebound from Microsoft starting in Q2 as their product cycles come alive again. Fourth quarter gross margin was about 31%, which was lower than last quarter, primarily due to work mix, and lower than last year, primarily due to lower volume.

Q4 gross margins in our GLC language business were 32.4% while gross margins in our GDT development and testing business were about 30%. Non-GAAP adjusted net income was $1.6 million, or $0.03 per share for the quarter. We had a GAAP net loss of $0.04 per share and ex-restructuring we lost about a penny in EPS for the quarter. And we ended the year with a positive net cash position of about $3.5 million, so our balance sheet continues to be in solid shape.

Now let me get into the details of 2010. For the full year, we generated revenue of $405 million. This is a [national] increase of 4% year-on-year and about 5.5% in constant currency. And, as Rory pointed out, our non-Microsoft revenue growth was about 7% in constant currency.

We achieved a number of customer successes in 2010. We saw strong year-on-year revenue growth from Google, HP, Rolls Royce Engines, and Dell. All of these are strong, growing, top-10 accounts, and we got our foot in the door with some impressive companies, where we have a good opportunity to prove our value and grow that account.

In my experience at Lionbridge, it is clear that sometimes all we need is that first win, even a small one, to get us entrenched into a new account, and then we slowly, steadily ramp them into secure accounts with recurring revenue and solid margins. It takes time, but it works.

From the segment standpoint, our GLC language business continues to win new business and expand some key accounts. And our GDT business is showing strong year-on-year growth. GDT was able to successfully expand accounts like HP, which offset some downturns with clients like Pearson and Merck.

As previously discussed, we did make some management changes in GDT mid-year, and it's clearly starting to pay off as revenue strengthens again. So all in all, I think the year was very solid, and as we begin 2011 our pipeline of new business seems to be strengthening as well.

Gross margins were 32% for the year, about even with last year, despite the work mix issues and the volume challenges at the end of the year. Our operating income ex-restructuring grew 30% year-on-year and I expect to see even stronger operating income growth in 2011 as revenue grows faster than operating expenses.

For the full year, we have recorded a tax provision of $1.4 million as the fourth quarter's tax provision came in at under $100,000. Going forward, we currently expect our quarterly tax provision expense to be in a range of about $750,000-$1 million per quarter in 2011.

Net income ex-restructuring was about $6.5 million, or $0.11 per share for the year. This is a year-on-year increase of $3.7 million on about $16 million of revenue growth. In fact, we had the strongest net income ex-restructuring in over about 5 years.

Some of you look at adjusted net income. For the year, we delivered $15.4 million of adjusted income, or $0.26 per share, strong year-over-year growth as well. Clearly we are controlling our expenses and our diligent cost management is starting to pay off, and we are in a good cost position as we grow the top line in 2011. So I expect to see an even stronger profit conversion of incremental revenue starting in Q2 and for the second half.

On a GAAP basis, we had a loss for the year of $1.3 million, or $0.02 per share. We are nearing the end of our multiyear restructuring plan, so we hope to shift to GAAP profitability towards the end of this year.

Moving to the balance sheet, our liquidity position remains strong, we generated $8.7 million in cash flow from operations in 2010 and that is after funding restructuring and investing in our software strategy. Our year-end bank debt remains at $24.7 million, and we ended the year with over $28 million in cash. As we said, that leaves us with a net cash position of about $3.5 million. So I am pleased with our cash management.

DSOs are 52 days, a slight increase from last year, but still quite strong for a company that collects receivables in over 25 countries. Clearly our global teams continue to deliver high quality services that our clients value.

Finally, towards the end of the year we renewed and extended our revolving credit facility for four years. It wasn't set to expire until late next year, but we decided to be proactive and take advantage of good rates. And given our strong performance during the downturn, our bank gave us very favorable terms on pricing and increased flexibility to mitigate foreign currency exposure that impacts the other expense line on our P&L. And it will allow us to invest appropriately and prudently to grow the business for the long-term.

For 2011, my teams are going to focus on three key things. One, supporting the sales teams to drive profitable growth. Two, maintaining expense control. And three, continuing our cash management as we invest in the business.

In summary, we delivered strong financial performance in 2010. Revenue growth is beginning to return. We have been, and continue to be, focused on reducing costs. Operating margins are starting to improve. We delivered the strongest net income ex-restructuring in over five years, and we are net cash positive.

Overall, as a company I think we are on a very solid financial footing, as you look ahead into 2011, and our outlook is positive. For Q1 we are reiterating our revenue expectation that we provided in our third quarter earnings release and conference call back in November of $98-102 million. This is in line with our traditional Q4 to Q1 seasonality.

Overall, our Q1 2011's P&L should look a lot like the fourth quarter of 2010. We are already seeing the pipeline grow from Microsoft and our recent wins, so for the second quarter, we expect to see typically strong sequential revenue growth and we should see a solid second half with further acceleration of revenue and profits.

So in summary we had a positive 2010 and 2011 is looking even stronger. I look forward to the year.

Rory, back to you.

Rory Cowan

Thanks Don. I think you get a sense of the positive momentum that we're starting to see here and in 2010 reasonably solid revenue growth of 6% in constant currency, about 7% ex-Microsoft. Strongest profitability in four years, and we're continuing to generate cash.

As you look to '11, much more revenue growth, despite some of the product cycles with our major customer. Diligent cost management's going to give us greater conversion of that revenue growth to earnings. We have new products and services coming to market. Our multiyear restructuring is coming to a close. So really in 2011 it's really all about revenue growth.

So with that, we'll open the call up to questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions.] The first question comes from Richard Baldry of Signal Hill Capital. Your line is open.

Richard Baldry – Signal Hill Capital

On the cost side of the table, if we look sequentially, I guess I was a little surprised to see G&A go higher given the restructuring efforts that you had, and maybe the above-the-line costs as well. On a $1 million sequential uptick on revs you saw almost a $2 million cost increase. Is there anything unusual in those cost items, and how should we think about those in '11 on a sequential or throughout the year basis? Thanks.

Don Muir

I think that we expect to have G&A pretty flat this year in '11 versus '10 for the full year. As we said, I think coming out of the third quarter, we are investing in sales and marketing. So that's probably going to be about 8% of revenue for the year, much like it was in the second half of 2010. On the G&A side in Q4 we did have some year-end expenses that really aren't going to recur. We did some year-end accounting tax type consulting work, so those aren't going to recur in this year. So I think that's pretty much it on the below-the-line operating expense side. We did have some mix issues as we alluded to a little bit and we expect to work through that as we get into 2011 and we do expect to see gross margins improve in 2011 versus 2010.

Rory Cowan

Yeah, I think Rich, on the above the line, the gross margin, or the cost of revenue that you see there, whenever we start up some new projects there's a fair amount of startup expense that goes around with getting teams over to various locations around the world. In some cases you're going to have people travelling the world to all their subsidiaries, and we expense all of that as part of our cost of goods sold line. So I think you'll see the gross margins getting back in line through 2011.

Richard Baldry – Signal Hill Capital

And maybe in terms of the revenue mix side, or geographically, or by verticals, there seems to be a lot of different pockets of strength and weakness around each of those concepts. Can you walk through what you saw in the quarter and what you might think might be your stronger areas in '11?

Rory Cowan

That's a good question. I think a couple things. Clearly, the tech vertical led by Microsoft for the half was really the biggest issue for us. Google, HP, that's great execution on our teams' parts. Those are growing nicely. I'm just going down some of our large customers that we talked about here on the screen. Nokia also, as they reconfigure their releases, we have a very strong relationship with them. That had had a soft spot, but that's coming back. Rolls Royce is a contract that we ramped last year. That's up almost 50% year-on-year.

So it would be hard to say sector where it's going, because our top 10 customers are about 55% of our revenue, so it's really customer-specific more than anything else is what I would say. Now the other 50% of revenue, we're beginning to evolve into more of a vertical organization. Life sciences continues to grow nicely, and we're going to start a financial/legal vertical in 2011 as well. But still, those are quite small. They're in the $20-40 million revenue by vertical.

Richard Baldry – Signal Hill Capital

Then if we look at the sequential guide, it really encompasses plus or minus, call it 2%, but directionally what would really determine whether you see sequential growth or a sequential dampening on the revenue line in Q1?

Rory Cowan

A lot of that, even with [inaudible] as you know, I sort of view Q1 as really a 10-week quarter because nobody's back to do business, and budgets aren't released oftentimes until after people's January board meeting. We find that things are pretty slow the first couple of weeks of the quarter, and then things begin to unlock. Really the question is - Q1 is actually the only quarter where we have more revenue, an uneven revenue recognition throughout the order. So March really determines what a Q1 looks like and whether budgets were released and projects are released early in March or late February or whether they delay a week or two. So it's really just timing of individual projects.

Richard Baldry – Signal Hill Capital

Thanks. And the last would be around Geofluent. With it looking like it's going to go GA in Q2, could you talk maybe a little more about what you're seeing in terms of how you're going to price that and go to market, how we should expect to think about that contributing to the P&L as we look long-term?

Rory Cowan

Good question. A couple things for that one. First, the way we're pricing this now, and we've worked with a lot of players on this, and it looks as though there's going to be an annual subscription and it will be per-language pair and per-application. Because there's a fair amount of customization that's required to embed it inside of a corporate application. So for example, if you're going to do French to English or English to French, that would be one language pair, and if you're going to really deploy that or configure it for real-time chat or tech support, that would be one model. And then for language by language across the top and of course application by application down the side. How that's going to come through the statements for us, once we start going GA of course, Don correct me if I'm wrong but that's when we start amortizing a lot of the development, right? So the revenue just nullifies the development which will see a little bit more cash because we're amortizing cash we've already spent. So isn't that the way to think about it?

Don Muir

Yeah, that's a good way to look at it.

Rory Cowan

All right. So we're going to have monthly recurring revenue is what we're going to be focused - and this is the SAS product of course - and so are we expecting customers to be at the low side, a couple hundred thousand dollars a year, at the high side, a million, million and a half depending upon applications? Yes. We'll still find our way on that one.

Operator

Your next question comes from Richard Davis of Canaccord. Your line is open.

DJ – Canaccord

Thanks guys. It's actually DJ on for Richard here. Rich hit a lot of the key items, but maybe I could ask another one on Geofluent, try and ask around the pricing question the same way. The questions that we get the most are how to size this opportunity. So based on the usage uptake you've seen with your Cisco, Intel, Symantec beta customers, what would annual spend look like with those guys now and with what kind of gross margin profile would that revenue contribute?

Rory Cowan

I don't want to be glib here, but I think we're trying to figure that one out too, because there are so many applications inside of a large corporation. So for example, with one of these applications we're actually dedicating our own marketing team to market this service within the corporation, because they see so many divisions, so many country managers, and so many applications. And so as I said, could this be a couple hundred thousand dollars a year? Could be a couple million dollars a year if someone were truly a SAS oriented global company. The challenge for a lot of the people we're having with the uptake on this is many companies are organized what I'll call "multi-nationally" rather than globally. Each country does its own language pair. That works, but it's a higher selling expense for us and higher configuration. The more advanced companies look at this as one instance in the cloud and they manage all the language pairs for the entire world from one cloud-based application. Those are the customers that we're targeting for this. Rapid deployment, easy configuration, inexpensive maintenance. That's what it feels like. And as I said, low side we see a couple hundred thousand dollars, high side you could see a couple million dollars for the customer.

DJ – Canaccord

Got it. And then I guess maybe you could talk about the pace of subscription in the Translation Workspace? I think we saw the number of ads kind of dip and go down sequentially. Is that in line with your expectations? I know you guys said that you were expecting to see that kind of expand in 2011 as you open it up to some of the enterprise customers. But maybe you could talk about where you see the number of subscribers kind of start to level off?

Rory Cowan

Right. Just to remind everyone, we first announced this to individual translators, so they subscribe to our environment. And then that enables them, of course, to participate in the Lionbridge ecosystem. More or less a subscribe-to-earn model. You subscribe to the software, you then get to be part of our supply chain and you get to use this software for your other customers. So that was the premise.

That was phase one for last year. Improve our systems, improve our ecommerce system. Improve our global multitenancy architecture, etc. etc., all the uptime. That is now done. We're now on schedule releasing that to other translation agencies and to enterprises.

When they subscribe to this to do some work inside the firewall, for those that don't want to sole-source with us of course, this will then drive more translators to subscribe, because they'll have to be on that platform to satisfy those other customers. Right? So 2011 is all about the enterprise, or corporate, side of the sales.

So I think what we'll expect here that, is it going to be - should we pick up another 2,000-4,000 individual subscribers this year? I don't know. I think 2,000's probably realistic this year depending upon the uptake of the enterprise licenses. We've got a couple of large players we're negotiating enterprise licenses with, and that's really going to set the tone for the rest of the year. If we close some of those in Q1 and Q2 we'll see the end market subscriptions tick up.

DJ – Canaccord

Got it. You guys have talked about having a network of 35,000 translators around the world and you only have a certain percent of them active at a given amount of time. Is it reasonable to expect that half of that number, so maybe 15,000-20,000, is a target for getting online to Translation Workspace over time?

Rory Cowan

Right. Over time absolutely. In fact, I think my ambitions are bigger than that, because that's just the group of translators that we work with. There are about [300,000-500,000] translators around the world. I've heard numbers, we've been talking with some folks in China right now, they're suggesting that there are 300,000 to 500,000 translators in China alone right now. And also translators come in and out of the market. They maybe a translator for a few months or for a few years, and then their life takes a different turn and they leave, so we're still trying to size this model. You talked about - that's just our network. I'd like to bring other agencies onto this platform, because this is an independent division for us and as other enterprises buy this we should begin to see them light up their network as well. And we're going to give them an economic model to use that sort of channels, if you will, to incent others to use this platform. So we're just starting the early days of the virtuous cycle.

DJ – Canaccord

Got it. That's helpful. And then last one, housekeeping for Don. What was the split GLC - GDT interpretation?

Don Muir

You're talking for the full year, or -

DJ – Canaccord

Just for the quarter if you have it.

Don Muir

The fourth quarter, GLC was about 72%, GDT was about 23%. The balance was [interps].

Operator

The next question comes from Kevin Liu, B. Riley & Company. Your line is open.

Kevin Liu – B. Riley & Company

Just to get into some of the gross margin stuff a little bit more, can you talk a little bit about your ability to hold pricing or even expand pricing, especially with some of the projects that are in the pipeline?

Rory Cowan

Yeah, the pricing issue is one everybody looks at, and it really depends by end market and by customer. And also by work mix. So there are lots of things that go into pricing. So for example, non-Japan Asian languages are generally priced a little more tightly. Because there isn't as much markup there. Japan and Nordic languages are generally priced a little bit more aggressively, got a little bit more room there, because the words are more expensive and also the quality standards and regulatory environments of those countries are generally higher. So that's the language portfolio.

Then you look across the other side of the matrix, which would be the end market. Tech seems to have the most price pressure, and the non-tech worlds such as life sciences, legal, and other areas, we seem to have the most price control, the most price leverage, because quality orientation, timeliness, heavily regulated environments.

Then within the tech world, generally it's the larger customers that we do a little bit better on price with because these are sophisticated, global deployments and they realize how important it is to have a timely, professional partner with them because missing a release date by a week to save $0.02 a word on French is probably not a good idea. Smaller tech companies that aren't as experienced in their global distribution systems tend to focus a little bit more on price.

So that's probably a more complicated answer than you needed, but that's generally what we're seeing in the world.

Kevin Liu – B. Riley & Company

Got it. And on the expense side, I guess in '09 you guys had roughly $7 million in restructuring type expenses, another $8 million or so this year. The G&A line in particular has been roughly flat for the year, so curious as to when we really start to see the payoff from some of these restructuring efforts and kind of what sort of net payback you expect here in '11, net of your investments.

Don Muir

A lot of our benefit to the restructuring has actually rippled through the gross margin line and it has helped us offset to some degree some pricing pressure and some mix issues that we've experienced last year. G&A line in particular, as I said earlier, will be flat roughly for 2011 versus 2010. We are making some investments in infrastructure obviously to support our new product releases, particularly in the IT area. So you're going to see some ongoing cost management efforts, besides restructuring, from productivity and efficiency improvements, etc. So we are very much focused on keeping a lid on expenses, particularly discretionary expenses, but I think the restructuring benefits have also been in the gross margin line as well as G&A.

Rory Cowan

I also think on the G&A side, remember we're investing - we're starting a software business here, so that's had a lot of overhead expense for the past couple years. So what we've been saving in GLT restructuring we've probably been spending a good portion of that. Now, you should start seeing that flatten out next year with revenue, not increase in the revenue rate, because again this year's been a very aggressive restructuring year for us, particularly with our European workforce.

Kevin Liu – B. Riley & Company

And then last one on just the Geofluent offering. At this point, given some of the beta testing you've done, any sense for how you expect the timeframe for rollouts to happen with customers outside of these beta guys? Specifically, just wondering how long it takes to get someone into beta and then convert them to kind of a GA paying customer?

Rory Cowan

It probably is going to take us - my bet is it's going to be a 90-day sort of timeframe. We're learning how to do the customization with these beta guys. They're learning about the APIs. All the normal stuff you go through with a couple of key customers, those sort of initial visionary customers. As I mentioned, we strengthened the sales leadership in that group by bringing in a proven SAS and software leader here in the Boston area. So we've got a pipeline of 40 or 60, that sort of range depending on clarity of interested parties. So he's going to be working through those. Is it going to be a 90-day to 120-day cycle before you see revenue? That would feel right, but that's after I get the deployment and customization processes down because this is a new experience for both of us. This ability to have true multilingual communication in real time for an enterprise, it's something everyone's talking about. We're actually offering it. So there's going to be an adoption, an absorption rate I think is a better way of saying it.

Kevin Liu – B. Riley & Company

I see. And then given the three large beta customers you already have, as well as perhaps what you have in the pipeline, are you still comfortable with kind of that $5-10 million run rate on the SAS side exiting this year?

Rory Cowan

Yeah, I think so. Will the math work at the lower end of that? Yes. I don't want to rush it. I don't want to get stuff out there and find that we have more deployments than we can satisfy, because language is gnarly. It is complex for an enterprise, so I'd rather pace our deployments and work on our full, real-time customization capabilities. The math works at the low end of that, but if it comes in a little bit better than that, because I've hired some big dogs in sales, we'll all be pleased.

Operator

The next question comes from Joseph Vafi of Jefferies.com. Your line is open.

Joseph Vafi – Jefferies.com

Don, how much are you saving in that expensive European office that finally got closed?

Don Muir

That's probably going to be a $4 million a year annualized savings. Obviously we're burning through some of the cash payments here early in the year, but that's a big savings going forward.

Joseph Vafi – Jefferies.com

Okay. Was that a discrete drop off or is that a trailing drop off?

Don Muir

A bit of a trailing drop off.

Rory Cowan

We had to reassign, we had to go in and do some projects there, had to move some customers to other locations. It wasn't that there wasn't business being done there. It's just that it wasn't being done very efficiently.

Don Muir

Every time we close an office, we have to transition the work to other locations, so there's a bit of a trail off as you mentioned over a couple of quarters.

Joseph Vafi – Jefferies.com

Sure. And I know I think Rory you mentioned that the Microsoft business probably should pop back a little bit in Q2. I was wondering how firm a visibility you have to that volume increase at this point?

Rory Cowan

I think as I mentioned, we touch Microsoft 100 individual buyers, about 200 programs a year plus or minus 10 or 15 of those things. They vary in scope and scale. Generally the smaller projects are in the newer Microsoft businesses. Those have shorter lead times. The older Microsoft businesses have very synchronized product releases, have very large activities. So we've identified and even awarded a couple of very large programs that will be multi-quarter programs that start at the end of Q2 and ramp to Q3 for a one-two kind of timeframe. The training has already started on our people because there's new technologies involved with those. And that's happening during Q1. So I can't give you any more than that other than I know that it feels as if we've been through this cycle before and it feels as if half two of Q2 is when we'll start seeing Microsoft on the big things ramp. It's really just a question of how much all the little stuff comes in between now and then.

Joseph Vafi – Jefferies.com

Okay. That's helpful. And then on some of these smaller lines of business at Microsoft, how centralized is that decision making for those smaller lines of business on globalization and localization and roll out.

Rory Cowan

That's a good question. It's very decentralized, and Microsoft, like many large corporations, has a centralized procurement group. You execute a master services agreement - every company calls it a little bit differently - which is you're then approved and have to sell to each of the buyers throughout the organization. So that's where we're actually reconfiguring our Microsoft teams this time to focus on a lot of that smaller activity in the newer businesses, because that often has more languages as well, because the newer businesses are more global rather than regional. So Microsoft seems to be firing on all cylinders right now, and I think that they're really getting their newer businesses ready for a newer environment.

Joseph Vafi – Jefferies.com

And then I guess just finally, on the GDT side of the business, where I think you said you made some changes, is there anything we should look at there in terms of maybe the full-time employees in GDT and utilization, or something like that to get a feel for that business moving in the right direction?

Rory Cowan

Yeah, that's a good question. GDT as we've reported publically, remember, has two components to it. One is our global search and source, which is very few full-time employees, but thousands of cloud-based employees. And it also has a traditional offshore business that you're familiar with, which is the onshore-offshore mini PMs in the United States or the U.K. with a lot of code and other things being delivered offshore. So I have to think about what metrics I can give you to follow that business, because they're both in the testing business, but they're quite different business models. So I really think you've got to look at maybe our revenue trend. We're up about 14% 2009-2010 in that business, and you should see some continued revenue growth as well in '11.

Joseph Vafi – Jefferies.com

Okay. And I guess the follow on is if you do get that kind of full-time employee piece of that business humming pretty well, what could that mean for overall gross margins do you think?

Rory Cowan

It should be a lift. I think that they had some - middle of last year there was some account churn there, and I had to bring in some new management, had to change some sales people and some delivery heads, the normal sort of cycle. I think that business got a little stale last year. So those guys are now getting their arms around the business and we're beginning to see it returning to a more traditional margin structure.

Having said that, we do have a couple of very significant opportunities that are onshore opportunities, by the way. I think a lot of people have tried China and tried India, and there seems to be for some of the test activity people want it closer to the development source. So we'll begin to see some ramp of the onshore activity this year as well. But you should see gross margin recovery from the Q4 level.

Operator

The next question comes from Harvey Poppel, Poptech LP. Your line is open.

Harvey Poppel - Poptech LP

I was surprised that you were able to generate, as you said, 7% real growth in 2010 despite the sharp Microsoft downturn. What I'm having trouble reconciling, though is that 7% growth against your stated guidance of 5-10% growth for all of 2011. It would seem, based on the initiatives that you have going, and other developments, that that number - I was kind of surprised as I got to the end of the press release, because I thought I would see a larger number. Can you reconcile that for me?

Rory Cowan

No, you're absolutely right. That's the question. You'd think with all the stuff that we have going, with the economy recovering, you might want to see us having full double-digit commits for 2011. I just don't think it's the time to be a hero right now. We'll see. As I said, with a relatively flat Q4 to Q1 transition, you really do have to have some significant growth in half two to really come out of that average point. If everything comes together, you could feel you might be a little higher than that, but I've been doing this long enough now that - you know, you get two or three customers in a row, and then one guy has a code problem and he ships by six, or eight, or ten weeks, and you miss some of your numbers. So I think it's best to stay where we are. We clearly would like to do more than that. I clearly think we've enabled more than that. I think we've quoted our sales force for more than that. But at this time I just don't feel comfortable giving any more than that.

Harvey Poppel - Poptech LP

Maybe you could give a little bit of the tilt of the growth in terms of what kind of a growth run rate might you be planning for the third and fourth quarters?

Rory Cowan

I think half one versus half two, Don, is maybe an easier way to think about it.

Don Muir

Well certainly from a year-over-year perspective, half one we're going to be up slightly. So the bulk of our 5-10% revenue growth guidance occurs in the second half.

Harvey Poppel - Poptech LP

So just imputing from what you said, that means you're going to be in the double digits in the second half. At least that's your objective.

Don Muir

That's right.

Operator

Your next question comes from Mark Cooper, Pacific Ridge. Your line is open.

Mark Cooper - Pacific Ridge

One of the questions I had, a bigger picture Rory, as I'm looking back at the numbers is the level and the consistency of extraordinary charges and restructurings. And maybe you could remind us what is the nature of your businesses? You have a sizable allocation to this each year.

Rory Cowan

You're absolutely right. I should have put a little finer point on that. You may remember in late 2005, we purchased a $220 million revenue company at that time that had lots of operations in Europe. We've started the restructuring process throughout that timeframe and this is mostly reducing our European headcount as our technology takes over much of what they're doing. And we're finding that we can put a little more of the engineering activity offshore. And in 2009, we announced about an $18-20 million restructuring program over a couple of years. As I said, that's sort of tailing off right now. I think in 2011 we said it might be another couple million dollars as we reduce the final fixed infrastructure for our European platform. We're just finding that we're doing more with less. Our technology is much more capable and scalable than we had anticipated. And we're finding that we just don't have to have this European footprint. And as you know, restructuring in Europe is a long and thorny process. The office that Joe Vafi asked about, that we closed in Q4, that was the result of an 18-month works council negotiation to get that done at the price point at which we were able to accomplish it. So Europe is - it's a gnarly place to restructure.

Mark Cooper - Pacific Ridge

And did you say, Don, that most of the benefit from this was in the gross margin line so that - I don't know what the margin potential is here, if we should be thinking it's -

Don Muir

A lot of the benefit is in the gross margin line, in our internal cost of sales. People that are managing these projects. We also have some G&A savings, but the bulk of the cost savings have been in that internal cost of sales line.

Mark Cooper - Pacific Ridge

Okay. And then lastly, the uptick in the sales and marketing line, there's about a point and a half of margin that looks like you're putting into that over and above what you've done historically. Can you remind me how - when you feel you start to bear fruit on that? And is that the second half of the year kind of numbers that you were looking at?

Rory Cowan

That lift has two components to it. One is the products business, the software business, and so if you think this is a $5 million series B software company that we're incubating inside the company here, if you look at most of those SAS businesses they have high G&A in the first couple of years, then the cash starts coming in. And already you start recognizing the revenue in out years. So of that lift, probably half of it is for the products business. And the other half of it is recrafting, retooling our sales force for the core businesses because we do see that the world is coming alive again. Our pipelines are growing, and people are beginning to buy again. So I think it's about 50-50 is the way to think about it.

Operator

The next question comes from Vincent Colicchio, Noble Financial. Your line is open.

Vincent Colicchio – Noble Financials

Just a couple questions. Most of mine were answered. With the improvement in your pipeline on the translation side, has there been an improvement in sales cycles as well?

Rory Cowan

You know, that's a hard one to call. I really haven't looked at it that way. We used the Salesforce dials with the red, yellow, green. You've got about 80 or 90 of [inaudible] and commission-oriented sales people around the world, so at that level, it would be a hard one to say. If it is getting shorter, it's not appreciably shorter. Because I haven't heard our sales guys talking about how fast - there's no panic yet to get work to market. People are still planning.

Vincent Colicchio – Noble Financials

What was the revenue contribution of the global sourcing and search business in the quarter? Do you have that number?

Rory Cowan

We haven't broken it out, but that number is probably clocking about a $40 million run rate right now. And if I could close the year at a $50 million run rate I'd be delighted with that. But it's really beginning to go nicely.

Vincent Colicchio – Noble Financials

Okay, and then lastly, top 10 as a percentage of revenue, I think you said 55%. Is that for the quarter?

Rory Cowan

It's been about flat for the quarter, and for the year. It's pretty constant. And again, that's in spite of the Microsoft slowdown for the quarter. Our other top 10 customers grew quite smartly, which I think is what I was talking about, maybe I didn't do it very well, which is communicating - mining existing customers and finding new customers. It's mining those existing customers. In fact I'd even say our top 5 have grown because the numbers two, three, and four grew quite smartly to overcome the number one timing problem.

Operator

At this time there are no further questions.

Rory Cowan

Great everybody. Thanks very much for participating this morning, and again, as always, if you have any questions, Sara Buda knows where to find Don and me, and look forward to talking to you. Thanks for your time.

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