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Lionbridge Technologies (NASDAQ:LIOX)

Q2 2011 Earnings Call

August 2, 2011 9:00 a.m. ET

Executives

Sara Buda – VP, IR

Rory Cowan – Chairman, President and CEO

Don Muir – SVP and CFO

Analysts

Joseph Vafi – Jefferies & Co

Richard Davis - Canaccord

George Sutton - Craig Hallum

Kevin Liu - B. Riley

Vincent Colicchio – Noble Financial

Operator

Welcome, and thank you for standing by. [Operator Instructions.] I would now like to turn today's meeting over to Sara Buda, vice president of investor relations. Thank you. You may begin.

Sara Buda – VP, IR

Thank you. Welcome to the Lionbridge investor call to discuss financial results for the second quarter of 2011. 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 15, 2011 the factors that may cause such differences.

Before I turn the call over to Rory, we should mention that Don Muir, our CFO, is dialing in remotely today as he's recovering from a knee injury. So now I'll turn the call over to Lionbridge Chairman and CEO Rory Cowan, and then we'll hear from Don.

Rory Cowan – Chairman, President and CEO

Thanks Sara, and welcome everybody, and welcome to Don. He has a knee brace that doesn't allow him to travel, so if during Q&A there's a little momentary lapse while we queue him in, please just be patient.

So today I'll walk through our second quarter results and the positive trends driving our business. Then Don will walk through our financials in detail. Let me start by summarizing the highlights for the quarter.

As you see, we delivered about $113 million this quarter, well ahead of our expectations, and this marks about 14% sequential quarterly growth. I'll comment on where the growth is coming from shortly, but we're delighted to see the strong demand from new clients that we had closed earlier. And as you know, it's about that nine month close-to-scale model that we have here.

And as we indicated at the last call, our existing top accounts are beginning to rebound a little earlier than we had expected. Total company gross margin was about 30.4%, reflecting the ongoing improvement from last quarter and again slightly ahead of, I think, the framework that we had shared.

With the growing revenue volume and benefits, our cost management is beginning to see some strong conversions of incremental revenue to opening profit compared to Q1. In fact, we saw about a 40% conversion of incremental revenue to operating profit on a sequential basis, and that's of course before our diminishing restructuring. So all the cost actions of the past 2 years are beginning to bear fruit, and now we're beginning to see the leverage from incremental revenue.

Comparing Q2 to last year, revenue was up about 8% year over year. Again, very positive. The operating profit conversion year-on-year was masked by a negative currency effect and the shift in work mix as we ran up new accounts.

We don't really have a fully GAAP auditable all the way through the statement currency macro, but our FP&A group does some currency activity, and this quarter in what looks to be constant currency, and that's latis, and yen, and euro, and all sorts of things. Actually, had very, very strong conversions compared to last year in a constant currency model.

On the net income basis, we reported about $0.03 GAAP and about a $0.04 ex-restructuring. So you'll begin to see even our restructuring is tailing off now.

Balance sheet remains strong as well, with ending cash balance of about $20 million, despite our strong sequential growth, restructuring, and our investments in the technology products business. So clearly it was a positive second quarter.

Let's talk about the demand environment that's leading to our strong momentum. We have emerged from these 3 quarters of revenue flatness that we had forecasted and are returning to growth, and I'm encouraged by this momentum for really several reasons.

The first one is I think we're just seeing better sales execution at all of our segments. Our GLC language business is starting to benefit from a stronger sales management and large accounts that are returning such as Microsoft and Nokia after a difficult start to the year.

Our GDT - and that's our development and testing business that shares a lot of infrastructure with the language business - is also showing strong growth year-on-year and sequential quarter thanks to the growth of the core testing business from accounts such as HP. And we're also seeing ongoing demand from large search clients in our GSS crowdsourcing business. So on all fronts better sales execution is driving positive momentum.

Second, we are ramping our recent wins. New clients are growing nicely into top 10 or 20 accounts and there's potential for further acceleration as the year unfolds and as we look into '12. We told you about some of these wins a few quarters ago, and sort of right on schedule they're beginning to ramp.

These clients are on a path to become part of our strong recurring revenue base, and this is what we really do well. We start with one program in one division and then grow steadily over time. Or, as one of our new sales leaders has nicknamed it, the "land and expand" strategy within large enterprises. So as I said earlier, it's about 9 months from close to scale, so this is working as it should.

And finally, I'm pleased with our new business teams. This is coming in on all sectors. Tech remains our largest vertical, but as we mentioned in today's press release, we're securing new business from a variety of end market segments, from industrials to automotive, to life sciences. And so we're delivering on the strategy to broaden our client base over time.

So a look at strong growth in Q2 and our outlook for the second half, if clearly demand is returning, and our investments in sales and marketing, which we started several quarters ago are really starting to pay off, just as we had planned. Quite simply, I think we're executing a little bit better and this gives us confidence as we build on this positive momentum during half two.

On the other side of our business is where we're investing pretty heavily on our technology business, and so we've got some exciting developments to share with you there, particularly on our SaaS area. As you'll remember, we have 2 SaaS products that share a common infrastructure and management team: Translation Workspace, which is the translation productivity tool, and Geofluent, our real-time machine translation application we're developing in conjunction with IBM.

First, for Translation Workspace, we spent the last year scaling our subscriptions with translators and agencies. We've almost doubled our subscribers in a year, and the annual spend is higher than we thought.

As with any SaaS business, we're constantly iterating to accelerate subscribers and increase the RPU and minimize churn, and we're more closely aligning our marketing programs with the supply chain needs of our GLT business.

We're finding that country by country, individual translators are looking for work. And this is sort of an extension of the crowdsourcing model as well as the productivities they get from subscribing to this model.

So that's very positive on the crowd, or the translators and agencies, but more and more exciting is that our recent development translation workspace is that we've secured our first really significant enterprise client win. And we'll be issuing a separate release on this in a week or so.

So our freelance base is expanding and we're successfully pursuing select enterprises. Overall, the results are encouraging. Clearly it's consuming cash still at this point, but we see the path as we go through the next couple of quarters where that should turn.

Second, we're making significant progress with our Geofluent real-time translation application that we've jointly developed with IBM Research. On the technology side, we're effectively speeding our time to customization, which as you may recall, was really a large part of our partnership with IBM.

That partnership wasn’t just taking a standardized IBM MT engine to market. It was about breaking the quality barrier of MT by combining IBM's powerful engine and their research and knowledge with our customization technology and expertise. As a result, our efforts have focused on accelerating the time and effort required to deliver a high-quality customized enterprise solution.

I'm delighted with the progress. We've shortened our time to customization from weeks now down to hours. This opens up a new slew of priorities for Geofluent and perhaps more importantly it offers a very sharp contrast to the free baseline MT tools on the web, which seem to be suffering from quality, security, and privacy issues.

Of course, if you're using the web to train an automated engine, and much of the multilingual content is already prepared by machine translation, you're using previously poorly translated materials to train an engine. So this is having some problems now with the public MT capabilities. And this is what we had thought would happen. So our customization efforts with IBM are really beginning to bear fruit. This 15 month long joint development agreement with them is beginning to leave that development phase and really enter the market release phase.

As you may remember, we've also completed our initial beta programs where we proved the scale, quality, and speed of the technology with 3 very sophisticated translation teams. Clearly these didn’t have the economics associated with them. They just proved the viability of the offering.

These beta tests were with a shared service translation groups inside of large enterprises, and we're now finding business opportunities within these companies as we move to the business units and various customer applications.

Even more exciting, however, is the traction we're gaining with the new prospects that have a clear business need for fast, secure, high-quality automated translation for email, chat, and web. We have a unique ability to solve this pain point for many of these organizations and it's particularly relevant in areas of customer care and marketing, where we're reaching and engaging customers online, where real-time interactions are crucial to their business. The pipeline is building nicely and we're also beginning our channel strategies. You saw a recent release with IBM and Sametime and other activities.

Overall, I'm pleased with our progress in the SaaS products group. Are we a couple a months behind where I'd like to be with the economic model of it? Absolutely, but the technology is becoming more secure, more scalable and more nimble, which really portends future success. And the market interest is also stronger and broader than we had originally anticipated.

So I guess quantitatively I'm pleased with our second quarter results, and qualitatively I'm pleased with our achievements. We've accelerated our sales growth with the strongest revenue quarter in a couple of years. Our new business is ramping. Major accounts are returning, and technology is proving its value in the market. We're broadening our market opportunities as we drive this long term growth, and we look to 2012 and second half of this year of course.

Now I'll turn it over to Don for the play by play for the financials and then I have a couple of closing comments. So, Don?

Don Muir

Thanks Rory, and hello everyone. Today I'll provide a financial overview of our very positive second quarter, and then I'll give you an outlook for the second half of the year, which we expect to be strong as well.

As you can see from the numbers, Q2 was a solid quarter. We delivered revenue growth of 14% sequentially from last quarter, and 8% year-on-year. This was one of our strongest revenue growth quarters in several years. We improved margins and profits on a sequential quarter basis.

In fact, as Rory mentioned, we saw a very strong conversion of incremental revenue to operating profit from Q1 - over 40% conversion sequentially ex-restructuring. And finally, we are maintaining a solid balance sheet despite fungible growth and investing in new products.

All in all, a good quarter. Now let me delve into some details. Q2 revenue was $113.2 million. This is up $13.6 million sequentially from Q1 and up $8.4 million from last year's Q2. Major contributors to our top line growth include, one, stronger than expected sequential growth from Microsoft compared to Q1, as some second half programs began ramping sooner than expected. We told you Microsoft would come back, and it came back a bit sooner than we had expected.

More importantly, we are growing our non-Microsoft business. In fact, our Q2 year-on-year revenue growth ex-Microsoft was 11%. The second reason for our strong Q2 was a return to growth among other top clients including Nokia. As you may remember, Nokia was down in Q1 due to some changes to their organization. So it's heartening to see the team back on track and growing both sequential quarter and year-on-year.

The final driver to our revenue growth was new business. Our investments in sales and marketing are starting to show some significant benefits. We have a number of new wins that are ramping nicely across our segments. Our GLC language business is scaling many recent wins into large accounts, as Rory had mentioned, so that team is executing well.

Our GDT development and testing segment is also benefitting from some strong new program wins, particularly with HP, an account that is performing very well for us. Our segment specific revenue growth is as follows: GLC language business increased 6% year over year. GDT development and testing business increased 12% year-on-year. The interpretation business, while small, increased 20% year-on-year.

Looking at the business sequentially from Q1, our GLC language business delivered most of growth, up $10.4 million or 15% from Q1. Clearly Q2 was a very strong revenue quarter for the company, and I'm quite pleased with our overall demand environment and the performance of our sales teams.

Looking at gross margins, year-on-year gross margins were down about 320 basis points to 30.4%. Roughly 220 basis points of that decline, or over two-thirds, were related to currency, and the rest of it primarily related to work mix in our GDT segment.

Looking at margins sequentially from Q1, we did see a healthy 240 basis points improvement from last quarter. This margin growth was slightly above the high end of our guidance range that we provided in last quarter's earnings conference call and the expectations that we had communicated, and that's due to higher volume in the second quarter.

So from a segment view, gross margins in our GLC language business were 32.4%. GDT was 28.5% and interpretation was 12.6%. Our second quarter operating expenses were down slightly in constant currency, despite our revenue growth and our ongoing investments in sales, marketing, and technology development. Clearly, with growing volume and a leaner cost model, we are well-positioned to accelerate earnings growth as new business ramps and large accounts scale.

Restructuring was about $640,000 this quarter. We expect a modest amount in Q3, perhaps a half a million, and then we should be largely done with this program as we exit the year. As you look below the operating profit line, you will see that other expense is about $400,000.

As most of you know, that is largely related to the currency effect of balance sheet revaluations. So despite the currency volatility in the quarter, we were able to keep that exposure to a minimum. As we've said in past calls, for your models going forward, we expect our other expense line to be plus or minus $500,000 per quarter.

Our tax provision for the quarter was about $600,000, slightly below our expected range of between $750,000 to $1 million per quarter.

Moving to GAAP earnings, Q2 EPS was $0.03, and as you can see from our release, non-GAAP earnings were $4.3 million or $0.07 per share.

Now let's talk about our balance sheet, which continues to be solid. As we mentioned in our last earnings call, we planned to consume cash during the second quarter as we grew revenue sequentially, started a new five-year GDT contract with HP, funded restructuring, and continued to invest in our SaaS products business.

Despite these investments, we held cash flow from operations to a minus $2 million for the quarter. This is better than we expected, particularly given the growth in the accounts receivables. When you look at our cash flow from operations, it is important to note that the investments we're making in our SaaS technology business, and in restructuring, which in aggregate has about $2.3 million impact on our cash from operations in the quarter, and about a $4.3 million on cash flow from the first half of the year.

The cash flow generation of our core services business remains very strong, and we're using that operating cash flow for all the right reasons: reducing costs, funding top line growth and new programs, and investing in new business models. These investments positioned us well for long term growth and competitiveness.

Global DSOs were 54 days, an increase of about 4 days from last quarter. This is driven by the linearity of demand in the quarter towards a strong June. Our ending cash balance for the quarter was $20 million, so we are able to fund growth and invest in the business comfortably at these levels.

So our balance sheet remains solid, and we continue to invest in the right areas. In summary, our Q2 results underscore our progress in growing the top line, managing costs, and maintaining a strong balance sheet. Looking forward, for Q3 we're estimating Q3 revenue to be between $108 and $111 million.

Historically, Q3 is down a bit from Q2 seasonally as Europe effectively goes on holiday. Business usually picks up back in September, and based on client visibility we expect a very strong Q4 and finish to the year.

For the full year, we are reiterating our growth estimate of between 5% and 10% top line growth with the expectation that we will come in above the midpoint of that range. So I'm feeling positive about our top line growth, and early indications for a strong 2012 exist.

So in summary I'm very pleased with Q2. Revenue is growing. New business is ramping. Margins are starting to improve sequentially, and our balance sheet remains in sold shape. All of this indicates a strong second half, and solid progress on our strategy to accelerate revenue and earnings growth.

Now back to you Rory.

Rory Cowan

Thank you Don. So before I open it up for questions I guess I'll reiterate what Don said. As we enter the second half of 2011 and are starting our planning for '12, I'm feeling pretty good about where we are here. We're clearly returning to growth. Our incremental revenue is driving strong operating profit conversion now that we have our core language business. And our investments in sales, marketing, and technology that we initiated last year are beginning to pay off. So we're feeling pretty good where we are, and pretty positive about second half of the year and first look at '12.

So now I'll open the call to questions.

Question-and-Answer Session

Operator

Thank you. [Operator instructions.] And our final question comes from Joseph Vafi from Jefferies & Co. Please go ahead with your question.

Joseph Vafi – Jefferies & Co

I was wondering, Rory or Don, if you could talk a little bit about the visibility for the rest of the year and maybe into some of the broader buckets of accounts, some of the newer ramping accounts versus some of your long-time big customers. Obviously this quarter was pretty strong. Is there visibility past this quarter? Was there a big pro this quarter? How should we be thinking about the confidence you have for the second half and in your top-line.

Rory Cowan

I'll start. Don, if you want to add, please jump in. First, I think as we mentioned, we're beginning to move the business away from the sort of episodic project-based activities, and more towards multiyear agreements. And within those multiyear agreements there are peaks and valleys, so your question is really the question to ask. Was Q2 just the "paying the python" or are we really beginning to see a ramp here. Don’t mean to mix metaphors, but I did.

So I think as we look at second half of the year, we look at quarters three and four as a package. I think as Don mentioned, Q3 really depends on what closes and what files are released by our customers in September. Because August is a pretty slow month for us.

I think second half of the year, we talked about HP. That's strengthening. You all know who our top five customers are. We released them. Microsoft is strengthening year-on-year and on a corporate level. We're also beginning to see, as I mentioned, our Department of Justice interpretations piece is growing, and of course Google is the other one.

Many of you have asked about Nokia, given all the activity in the news. I want to remind you that we're unit-independent in our relationships with Nokia, so if they release a new product, we prepare it for them in 80 or 100 languages. So the sell-through numbers don't really affect our revenue with them. That's first.

Second, as they bring out new products, that's when we begin to ramp and of course as you know, Nokia is committing to a Microsoft platform, and they're bringing out many new products. So there's a lot of hesitation in Nokia now, as people decide what the restructuring effects are going to be, and we're beginning to see some stability return in that account. And we interact with Nokia across all of our businesses - our content business, our language business, as well as our development business. So I think gives us some strength for our second half as well.

And Microsoft, our non-Microsoft is up about 11% year-on-year. So a lot of the businesses that we closed last year are now beginning to ramp, which is just what we wanted to see.

Joseph Vafi – Jefferies & Co

Is there any issue, or is it a benefit or a risk, that if Nokia's rolling out their new set of phones on a Microsoft platform and Microsoft's a big customer for you already. How should we be thinking about that? Is that a positive or a negative or is it just a coincidence?

Rory Cowan

I think it's a good question, but I think it's just work to do. We have two completely different environments, and Nokia, remember they're working with the code. They're going to alter the framework for their own portfolio of end markets and end users. And that's really where we come in, Joe, is remember, we really work with that user interface to make sure the languages are appropriate and configured for the current local Nokia environment. So even though they're sharing the code base, and sharing the positioning, it really has very little impact on our business.

Joseph Vafi – Jefferies & Co

Okay. And then if we do see a little bit more incremental growth here in the business, I guess maybe toward Q4, would we expect the same conversion of incremental revenue to margins that we saw here in Q2. How should we be thinking about margins if revenue ramps?

Rory Cowan

I'll leave that to Don, because he does the incremental stuff. But I will say that as our restructuring winds down, we're getting very strong control of our worldwide cost model now, so these conversions, these incremental conversions, really seem to be holding. But Don, do you have any observations?

Don Muir

Yeah, I think that we should see, particularly in Q4, when we have incremental revenue as you mentioned, we should see some strong conversion, like we did in Q2. Certainly things like currency will play a role, though the unpredictable euro is down today versus the dollar, yesterday it was up. So it's a bit of a crapshoot there, but that’s not a huge impact on us. It was year over year, but sequentially it's not that bad. So I think you can expect to see gross margin improvement with incremental volume, particularly in the GLC segment.

Joseph Vafi – Jefferies & Co

And finally, just one question on Geofluent. Rory, did I hear that maybe you're looking for more general release maybe early next year now in some of the commentary you were talking about? Or do we still expect to see a little bit of revenue from Geofluent here in 2000.

Rory Cowan

Well, two things. First, of course it's a SaaS deployment, so even if you close a couple hundred thousand dollar deal it's going to be incrementally divided by 12. We've already gone to general release. But it's the configuration process that we're moving towards now. We're developing some APIs for some other channels.

We're finding the enterprises are the ones that are the most interested in this with a couple of applications. First, a lot of customer care centers are receiving many emails that they're just dropping on the floor right now. You can't afford human translation for those. So that's one application. Second is, of course, real-time chat to be able deflect chat sessions from expensive European call centers to offshore call centers. And third of course is just a "translate now" button on a website that we have trained the content that's more appropriate for that application.

So I think we'll see some revenue this year. As I said, is it behind by a quarter? Probably. But is the pipeline building, and are the economics proving in the test cases that we're looking at, probably a lot stronger than we had originally anticipated.

Operator

Thank you. Our next question or comment comes from Richard Davis from Canaccord. Your line is open.

Richard Davis - Canaccord

Maybe just a quick followup on the Geofluent side. Sounds like the early customers or deployments are positive. Have you talked about, or kind of worked out, the pricing? How much they're paying, what the business model is, so we can at least think about how this thing - we've kind of talked at it at a high level, but how would this thing roll and the addressable market opportunity in that respect for next year?

Rory Cowan

Yeah, pricing. That's a good question. We're seeing deals anywhere in that sort of $80,000 to $300,000 range. It's fairly broad. The model, of course, is a number of language pairs. Because that determines the technical support activity and the customization requirements, and number of seats, the required number of users. Classic sort of SaaS model. And it also really depends upon the language pairs, because some of them are easier to customize than others. It also depends upon the state of the client's internal content. In some of the tests we've been doing, some people have a lot of content, so it's an easy configure. Other people are really having us use our GLT business to translate all their chat streams, which then in turn train the engines. And so we're still sort of figuring that out, but it looks as though it's going to be low end $80,000, high end $300,000 a year kind of subscriptions. And that's on a per-language model, because there's a customization component and a maintenance component as well.

Richard Davis - Canaccord

And it's probably too early to think about it this way, but the translation workspace, let's imagine that it ends up working well. Would you ever consider porting that over to other talents and things like that - not that you're going to take on Monster as a job board, but are there thoughts with regard to that? You could go to adjacencies and stuff like that? Again, I suspect this would have to be in '12 or '13.

Rory Cowan

It's interesting that you say that, because what we are finding as we work with the crowd and cloud - of course Geofluent is in the cloud translation workspace - it excites the crowd. And as we look at those two, we're finding that as we work with the crowd now, people are really interested in - perhaps the software is interesting, but it's more the community that's being built by it, and their availability, their ability to get some business or some work from this.

So the job posting capabilities. We've developed quite a lot of activities. We can send out email alerts to translators around the world that they can actually accept via their smartphones if they want to accept the job or not. They can continually check the posting capability.

So your intuition is correct. I don't want to broaden this too far until I really have the RPU down, the churn rates down, by country and aligned with the needs of our core language translation business, but that's going to be sort of mid-12 is my bet, once we've figured that out.

Because we are doing marketing programs in 80 countries. So when we go live, we go live in 80 countries. We don't go live in 8 zipcodes. So I've got to figure that all out, and then I can begin to think about horizontal expansion for this.

Operator

Thank you. Our next question or comment comes from George Sutton from Craig Hallum. Your line is open.

George Sutton - Craig Hallum

So coming out of last quarter, the big issue was gross margins and obviously you saw a nice sequential improvement. And I'm wondering if you could break that down between some of your newer wins beginning to ramp and become more profitable, or the older customers coming back at higher margins.

Rory Cowan

You're asking the right questions. I'll let Don answer more precisely, but the way to think about our gross margin, our costs above the line are two components. There's a variable component and a fixed component - all of our program and project managers. So a fair amount of that is just volume leverage on our fixed expenses. So that's one piece of it. Another piece of that, of course, is reducing our costs in many cases, both variable and fixed, which is increasing the value-added revenue that converts to gross margins. So two components: Volume-based, and then what I call contribution margin, or VAR, to the fixed component of gross margin. Don, do you have anything to add to that?

Don Muir

I think you pretty much covered it Rory, but certainly in the early stages of a new account the incremental startup [inaudible] are going to impact gross margins more severely in the first couple of quarters than once the account matures. You'll see some margin benefit from riding the learning curve and improving productivity and shedding some of those initial startup costs.

Rory Cowan

So we had a fair amount startup cost in the business with some of the newer accounts. But we're also beginning to see some of the ramp from the older ones.

George Sutton - Craig Hallum

Great. And you had mentioned the public machine translation issues. Google's translation platform got pulled down, and obviously they're going to work that into a pay model. And I know you had some marketing initiatives around that, given the quality of what you offer. Can you just give us an update of how well that marketing program has gone?

Rory Cowan

Right. Just to remind everybody, the tension between public translation and private translation really centers around the customization of the engine. So if you think about your first year business school analysis, a high fixed expense to customize an engine, and then a low variable expense per word. If you're able to reduce customization cost through very real automation, then you could increase the quality at a lower entry point, reducing the barrier to entry.

Our SaaS model allows for rapid deployment, because infrastructure costs are reduced. Our customization capability, from a lot of our knowledge, coupled with our joint development agreement at IBM, are reducing those customization costs. So we put that together, and we're beginning to see higher quality at lower cost, just what you'd like to see.

Conversely, as I mentioned, public MT is training the engines from previously translated material which was done by machine translation, so it can get into a doom loop and I think there's an Atlantic Monthly article about this, by James Fallows, that really talks about this in some depth. I won't be quoting Atlantic Monthly on an earnings call. But if you're interested in that, you may want to look at it.

Our marketing program, we started some target marketing to look at the customer care area. We've had a number of webinars, and the response has been really truly gratifying. Now we're beginning to hire more product managers, more of the deployment-type sales engineers, all those sorts of things, to get ready for deployment next year.

Operator

Thank you. Our next question or comment comes from Kevin Liu from B. Riley. Your line is open.

Kevin Liu - B. Riley

On the SaaS side, specifically Translation Workspace, you talked about an enterprise win there. Just wondering if you could get down to the per-subscriber level and talk about the differences in RPU out of an enterprise versus your traditional agency or individual subscriber.

Rory Cowan

Yeah, I think with the enterprise model, we're offering someone the ability to customize it and manage it to manage their own communities. Think about Translation Workspace on two levels. First, it's very, very sophisticated matching, or leverage, algorithms, right? To really get a sense of the previously translated material in the millions and millions of words. So that reduces words going to new translators. Secondly, they have a capability for a number of subscribers, but they may want to build their own communities around some proprietary content or some proprietary applications. And I don't want to go into the individual economics until we've formally done the press release, but you should see something in the next four six weeks, something around that range.

Kevin Liu - B. Riley

And then can you talk about the pipeline of additional enterprise wins there? Is this going to be a big focus in terms of driving revenues out of Translation Workspace?

Rory Cowan

Yeah, I want to get a sense of how this one works and scales, because as you know, supporting an enterprise SaaS product has different economics than supporting individual global users. I've got the latter down pat. I want to see what the economics are of the former, just to make sure that it's repeatable and appropriate for us.

Kevin Liu - B. Riley

Got it. And a followup on the pricing for the Geofluent product. Now that you have it the three separate modules, curious to whether there's a difference in how the three modules are priced relative to each language pair.

Rory Cowan

I think we're still working on the pricing by language, because it really depends on current content. Normally there's a services component. There's a deployment component. And there's a maintenance component with it. And we're still sort of working that through, because we have our framework, but then you get inside of these corporations, and corporations are messy. Everybody has their own set of data, their own authority, and their own market expectations, and so we're still working our way through that. I wouldn't feel comfortable putting anything more precise on it.

Sara Buda

Kevin, just to add to that, in terms of distinguishing between pricing around something like web, versus pricing around something like chat, versus pricing around email, those do differ. In the chat world we would obviously be looking at it more on a per-agent basis, or per-user basis, as where on the web that's obviously something that you wouldn’t necessarily measure. You'd measure something like usage. So the pricing models are different by application, but as Rory mentioned earlier on the call, for a total enterprise deployment it can run anywhere from $80, 000 to $300,000, depending on number of languages and number of applications.

Rory Cowan

And we're getting some very real feedback on the very high ROI with this as well. It's not just marketing orientation, which is enabling new markets, but also given existing customer care models, this has some very real economics that are pretty impressive.

Kevin Liu - B. Riley

And just one on the services side. You mentioned customer like Microsoft are starting to come back a little earlier than anticipated. Given the multiyear type agreements that you have in place, does it pull ahead any sort of revenues from what you might have expected in the back half?

Rory Cowan

Yeah, that's hard to see, because as you know, as we mentioned, Q2 was a little stronger than we thought, across the board. Q3 and Q4 we're sort of looking at as a package, because September is really the driver there. We know the projects are there. We're setting up. It's a question of when the files drop, in September or first week of October. So you sort of look at it in those ranges. I don't think there's any pull-forward. I think that we know what the projects are. It's just a question of when they're deployed.

Operator

[Operator instructions.] Our next question or comment comes from Vincent Colicchio from Noble. Your line is open.

Vincent Colicchio – Noble Financial

What portion of revenue was international in the quarter and also does the company have any exposure to any countries in Europe that should be a concern?

Rory Cowan

Don, do you want to handle the international components here?

Don Muir

Yeah, certainly if you want to talk about the exposure, it's largely from a currency standpoint. That's probably the biggest exposure. I don't think we have any real sovereign issue of exposure if that's what you're referring to. But historically the euro represents about 35% of our revenues and 30% of our costs. That's the biggest driver in terms of the risks that we have on the currency side.

I think as Rory alluded to, we've got operations in places like Poland and India, and obviously China, so we do have some currency exposure related to the renminbi in China and the zloty in Poland and the rupee in India. We don't necessarily have revenues denominated in those currencies, so as those currencies strengthen against the U.S. dollar, we do have some exposure there.

But if you look at the euro, we do have revenues denominated in euros, so about 5%, $5 million a quarter long on expenses exceeding revenue. So I think that's going to continue for the balance of the year. Europe slows down typically in Q3, so you'll probably see a bit more of a bias towards the U.S. dollar denominated portion of our revenues which typically run about 60%.

Vincent Colicchio – Noble Financial

And on the translation side, Rory, has there been any change in the competitive landscape? And if you could talk about pricing, that would be helpful.

Rory Cowan

Yeah, I think it varies as it always does. It varies by segment and by customer. I think there's been clearly, in the downturn, as with every industry in the United States, there's been some downward price pressure, and it's been very, very low single digits. I think it's customer specific.

We do find, however, that customers are looking increasingly bifurcated model, paying more for higher quality for publication-grade or highly fault tolerant activity, then maybe they're adding more content they didn’t translate previously to more automated, lower-quality solutions. So it seems to be bifurcating nicely. Of course, we're designing the company to address both of those. Higher quality, professional translation and sort of faster-turnaround, more automated solutions for the lower quality standard work.

Vincent Colicchio – Noble Financial

And last question, how does the margin look on the new deals you signed this quarter compared to your existing business?

Rory Cowan

We sort of pro forma these things, and I think it looks as if margins are holding. You've got to look at these margins over time, right? Because you have a startup phase, and can have sort of a year-long agreement. So we look at the whole package. You as an investor - when a deal ramps you may have some headwinds in the first quarter and then you get some strength in outgoing quarters. So collectively the margins, no real changes in these things. But I question whether it will just be timing, when they come through the statements.

Operator

Thank you. And I'm currently showing no further questions or comments. I'd like to turn it back over to Sara Buda for closing comments.

Sara Buda

Great. Thank you everybody. As always, if you have any further questions, please feel free to contact me, Rory, or Don and we'll answer questions as needed. Thank you very much.

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