(Operator Instructions) I’d like to introduce for today’s conference Ms. Sara Buda. Please go ahead, your line is now open, madam.
Thank you and welcome to the Lionbridge Investor Call to discuss financial results for the fourth quarter and fiscal year 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 March 13, 2010, and in subsequent filings.
And now, I’ll turn the call over to Lionbridge Chairman and CEO, Rory Cowan.
Great. Thanks, Sara, and good morning everybody. Thanks for joining us.
Today we’ll review our strong year-end results and discuss our approaches and strategy to 2012. But first let’s talk about Q4. You all have the release in front of you I assume. So Don will do a play by play and sort of walk you down the income statement and through the balance sheet. So I’ll spend a little bit more time really talking about our milestones for the quarter.
First, in revenue growth, of course, we delivered about $107.4 million, marking another quarter of 7% year-on-year revenue growth. Q4 revenue was slightly below our expectations. However, in constant currency with Q3, fourth quarter revenue was about $109 million. So we would have seen another sequential quarter of – quarter uptick as well. But more importantly, what I’m pleased is this growth came from – was really quite broad based across all areas of the business.
We grew our large existing accounts, including the clients and search, life sciences and automotive sectors. We ramped our newer wins into multimillion dollar relationships, including our recent win with the market leader in consumer technology. And we stabilized revenue with our largest client in the quarter. So overall, I’m confident in our demand environment as we head into 2012.
The second positive milestone for the quarter was gross margin. You see that gross margins grew about 200 basis points year-on-year. And those of you that have been following us for a while understand that volume really has a very nice effect on our gross margins, and we grew about 100 basis points sequentially from Q3. And in Q4, I’m particularly pleased with this, because of all the sort of paid time-off and vacation time around the Christmas holidays. So we’re seeing an overall strengthening in our profit profile.
Third, we delivered about $3 million of GAAP net income in the quarter, or about a nickel a share. The earnings growth stems from three factors. It is, of course, revenue volume, the benefits of our cost management actions over the past 18 months or so, and of course, a more favorable currency mix. As a result, in Q4 we drove about a 60% conversion of incremental revenue to operating profit on a year ex-restructuring.
Finally, cash flow. We drove about $8.3 million of positive cash flow from operations in Q4. So looking at all the factors, revenue growth, gross margins, earnings and cash flow, Q4 was a solid quarter.
So now let me take a moment and just look at some of the strong achievements for the year, and then I’ll share with you what our plans are for 2012. I’ve been characterizing 2011 as a year of transformation of Lionbridge, and as we view it, this is the early phase of the sustainable turnaround that we’ve all been working for for the past 24 months to 36 months.
As most of you know, we spent the last several years focusing on costs, and in early 2011 we shifted that focus to revenue growth and investing in innovation. And so you begin to see that these investments in growth initiatives are beginning to payoff.
In 2011, we delivered about 6% top line growth, or about $23 million year-on-year. And we drove this revenue growth despite a sobering $8 million decline year-on-year from our largest client. In fact, excluding this client, we delivered 10% year-on-year growth. So again, I think a lot of the initiatives we put together 9 months, 18 months ago are beginning to payoff.
In Q4, revenue from that client stabilized, and we expect that stability to continue in 2012. So we’re not really putting much growth for that large client into the 2011 plans, although we do see a firmness from a lot of their newer wins – their newer programs in consumer, mobile and entertainment divisions, where we have deep relationships. More importantly, we effectively diversified our revenue in the new vertical markets, secured a record number of multimillion dollar engagements and established new offerings.
I think in 2011 we also achieved we positive GAAP net income for the first time since we initiated our multimillion dollar cost reduction program several years ago. And we generated about $10 million in cash flow from operations despite our investments in SaaS technology and other growth initiatives.
So in sum, I think we delivered really solid financial achievements for 2011, drove record revenue, returned the business to GAAP profitability and continued to generate cash. On the business side, I’d group our achievements in really three key areas: new business, new technology and new offerings.
In terms of new business, as you saw from the release, we secured 17 new multimillion dollar engagements with companies across a wide spectrum of industries. During the year, we began aligning our sales and operational structure to serve the needs of clients in certain high-potential vertical markets, such as life sciences and retail. Our wins in 2011 really underscore the value of this refined go-to-market strategy.
On the technology side, we continue to extend our leadership in language technology, and as you may remember, we have two SaaS-based technology offerings; GeoFluent, our customized machine translation technology through our partnership with IBM Research, and Translation Workspace, our productivity tool for translators and agencies. We’ve made great progress in both areas.
First, for GeoFluent, we announced GA midyear after several months of transforming the technology into a secure, scalable platform for commercial deployment. After touching a number of end markets, we’ve really focused on the customer care market, which then we quickly established a joint technology sales and marketing partnership with LivePerson, who many of you know is a leader in online chat. And this allows them to bring real-time multilingual chat to market.
And most importantly, in Q4, we established our first commercial engagement for GeoFluent, a large technology provider, to deliver real-time translation of blog and forum content.
While it’s disappointing it’s taking a little longer for us to convert all of this interest in technology into revenue, I’m pleased with the ongoing demand for this initiative in the cloud-based real-time applications. We are seeing that people have interest in it, and I think what we underestimated is the reconfiguration of internal infrastructures that are required of oftentimes three, four, five internal systems to enable a multilingual chat, to really save them the 30%, 40%, 50% that they want to save. So it’s internal customer deployment challenge.
For translation workspace, we have added more than 1,000 net new subscribers during the year. Today, we have about 3,300 subscribers. And Translation Workspace is becoming a SaaS platform of choice for agencies and translators. We also secured a very large enterprise win for Translation Workspace as well.
So that’s the technology piece.
The third prong in 2011 was new offerings, and this is our new global marketing operations offering, or GMO as we call it. And GMO is a service for managing digital marketing campaigns across languages, technical platforms, all the web content management systems around the world, and adding local content.
So what I like about this offering is that it brings together our existing capabilities at language, content and technology, but it also builds upon our worldwide platform of offices. For clients, we launched – I’m sorry, for clients, GMO improves online customer engagement in global markets and reduces their cost by as much as 30%. For Lionbridge, GMO enables us to sell to new executives within large enterprises who are struggling with the complexity of global online marketing.
We secured a number of engagements for GMO in 2011, which are ramping in 2012, and we expect it to generate as much as $10 million of incremental revenue in 2012. In fact, I just learned that we signed a three-year multimillion dollar GMO contract with a world-leading consumer brand just this week.
In sum, the strategic achievements of 2011 are driving benefits for the organization and position us for positive 2012.
I think our priorities for 2012 are simple, and it’s really just one of staying focused on these three initiatives, grow the top line across diverse end markets, deliver strong revenue to profit conversion, and scale our new offerings. To deliver on these 2012 priorities from a segment standpoint, so I’ll talk about our two major segments, GLC and GDT here.
Our GLC, or our language business, will really focus on two areas. Accelerating our vertical market strategy with dedicated teams, and that’s both sales and delivery, to capitalize on growth opportunities in those unique end markets. For example, the needs in life sciences are quite distinct and needs translating a website. The needs for clinical trials activity translation very, very different than even medical devices. So really focusing on individual end markets. And secondly, the GLT team – or GLC team, I’m sorry, will focus on the early success of GMO and GeoFluent.
In GDT, under the leadership of our new Senior VP, this segment will also our 2012 priorities. Given her successful track record of growing companies in the IT services and offshore markets, she is already hitting the ground running. The underlying growth opportunity in our GDT business is strong, particularly as we’re look at our unique expertise in cloud-based search testing and traditional application testing. And will build upon our worldwide footprint of global delivery centers. And Martha has already worked with our global teams to align these offerings into compelling competitive go-to-market strategies. So what we did with GLC during 2011, Martha is going to focus on with GDT in 2012.
So in summary, we enter 2012 with strong momentum across the business. We have a stable, growing base of existing accounts. The new business pipeline is strong. GLC business, the language business, is benefiting from a refined vertical market strategy, as well as some new offerings. Our GDT business has new leadership, which will drive profitable growth in 2012 and 2013. Our SaaS offerings are gaining market traction. And I think we have a favorable marketing environment for ongoing earnings growth, as we’re touching very many end markets around the world, from mature industries to software, to life sciences, to retail. So I think we’ve got a nice diverse set of end markets.
So now, Don, I’ll turn it over to you.
Hello, everyone. Today I’ll walk you through a review of our positive results for the quarter and the year.
Let me start with Q4. Revenue was $107.4 million for the quarter, a year-on-year increase of 7%, or $7 million. This marks the third consecutive quarter of strong year-on-year top line growth. Sequentially, Q4 was roughly flat versus Q3 in nominal terms. However, as Rory pointed out, in constant currency with Q3, fourth quarter revenue would have been over $109 million. Overall, our demand environment seems firm and our sales teams are executing well across most product lines, verticals and geographies.
Gross margin for the quarter was a healthy 32.9%, an increase of 200 basis points year-on-year. Q4 gross margins in our GLC language business were 34.4%. Gross margins in our GDT development and testing business were about 32.5%, and interpretations gross margin was about 15%. So we drove strong margin improvement across our business segments in Q4.
Total non-cost of revenue operating expenses of $30.7 million decreased about $2 million versus last year, led by declines in restructuring costs and lower G&A. Q4 operating profit of $4.7 million increased by $6.4 million versus last year, as we delivered a solid conversion of incremental revenue. This was driven by top line growth and gross margin improvement. We also continue to control our overhead expenses, while making the necessary investments in the business.
This quarter you have to look at our tax provision and other expense on a combined basis, and that is because of the release of a tax indemnity reserve for uncertain tax positions related to our BGS acquisition. While this resulted in a favorable tax provision benefit of about $2 million in the quarter, this tax benefit was offset by an equal expense that hit the other expense line for the same issue.
In total, these adjustments had no impact on net income in Q4 or the full year. Excluding these reserve adjustments, the Q4 tax provision was about $880,000 and other expense was $580,000. So the takeaway here is that, for your models going forward, I would continue to focus on a tax provision expense of about $750,000 per quarter and the other expense line running at about $500,000 each quarter, depending upon foreign currency fluctuations.
From a GAAP earnings perspective, our net income was $3 million, or $0.05 in the quarter. This marks a solid increase of $5.6 million, or $0.09 per share, versus last year’s Q4. Some of you look at non-GAAP as well. For Q4, our non-GAAP net income was $5 million, or $0.08 per share. As you remember that adjust for restructuring, amortization of acquisition-related intangibles and stock-based compensation. We also generated $8.3 million in cash flow from operations in the quarter. And with $25 million in cash, we ended with a positive net cash position. So our balance sheet continues to be in solid shape.
So all-in-all, Q4 is a very strong quarter; solid revenue growth, ongoing gross margin improvement, positive $0.05 GAAP earnings, and over $8 million in cash flow.
Now let me get into the details of the year 2011. For 2011 we generated revenue of about $428 million. This is an increase of 6% year-on-year, and as Rory pointed out, our non-largest customer revenue growth was about 10% for the year.
Looking more closely our revenue mix, we achieved a number of customer successes in 2011. We saw strong year-on-year revenue growth for many top 10 accounts, including our second largest client, a large search engine company, and our third largest client, a leader in printing and imaging. We also grew our interpretations contract with the U.S. Department of Justice, and our revenues with a large UK-based aircraft engine manufacturer. So we grow our top 10 clients about 5% year-on-year in total, despite the headwind from our largest customer.
What I find most heartening, however, is our strong growth outside of our top 10. We successfully ramped a number of new accounts in the life sciences and manufacturing sectors. And even within our traditional base of technology clients, we saw pockets of strong growth from a large consumer tech company, a large storage company, and a leader in networking. Thanks to some of our newer initiatives, like GMO, Global Marketing Operations, we continue to find new ways to expand and grow our base of recurring revenue.
So I am pleased with caliber of clients we have and the growth opportunities within these accounts. And as we begin 2012, our pipeline of new business seems to be strong as well. So that’s revenue. Now let’s take a look at our improvements in gross margin and operating profit.
Gross margins for the year were 30.8%. As you look at how gross margins progressed throughout 2011, clearly, Q1 was very challenging, followed by steady sequential quarterly improvement throughout the year. This year, we begin 2012 with a much stronger gross margin run rate than we had a year ago. As always, gross margins are driven primarily by revenue volume, as well as currency and work mix.
Moving to operating expenses; sales and marketing grew $2.3 million year-on-year and continues to run about 8% of revenue as we invest in our growth. G&A for the year was $75 million, and as we said before, we expect G&A to run about $19 million per quarter at today’s currency levels. So we continue to keep our G&A expenses relatively flat. This operating expense management, combined with our revenue growth and gross margin improvement, drives strong revenue to operating profit conversion.
For full year 2012, we expect at least a 30% conversion of incremental revenue to operating income year-on-year, depending on revenue and currency, and this is despite our ongoing investments in sales and marketing technologies.
So overall, I’m pleased with the underlying profit capabilities of the business. As you can see, our multiyear restructuring program is largely complete. That said, you may see some restructuring expense in 2012 if we take an opportunity to selectively reduce one of our European locales. But I would say that days of having between $2 million and $4 million of restructuring expense every quarter are largely behind us.
From a GAAP earnings standpoint, we delivered $0.03 per share for 2011. We are delighted to see a positive GAAP net income even after incurring $3.4 million of restructure expense during this year and funding about $4.5 million for our SaaS technology strategy. So the P&L continues to show solid progress in all areas, revenue is growing, margins improved throughout the year, and we returned the business to positive GAAP net income.
Now moving to the balance sheet. Our liquidity position remains strong. We generated $9.8 million cash flow from operations in 2011, and that is after funding restructuring. Our year-end debt remains at $24.7 million, and we ended the year with over $25 million in cash. As we said, that leaves us with a slightly positive net cash position. So I’m pleased with our working capital management and our ability to fund our investments in sales and marketing and technology.
DSOs of 49 days, a decrease of three days from last year, and keeping DSOs in this 50-day range is quite an accomplishment for a company that collects receivables in over 25 countries. Clearly our global teams continue to deliver high quality services that our clients value.
So in summary, we delivered strong financial performance for 2011. We generated solid 6% revenue growth. Our large accounts continued to grow. We won a number of new engagements with clients across industries. We scaled several of our recent wins into multimillion dollar accounts. Gross margins improved steadily throughout the year. We continued to manage expenses, while funding appropriate investments. We delivered the strongest GAAP net income in over four years and we generated strong cash flow.
Now let me touch on Q1 and FY 2012 outlook. For Q1, we are estimating revenue of between $103 million and $107 million, reflecting today’s currency environment, which, as we said, dampens revenue, but tends to favor profitability. On the gross margin side, we should see at least a 200 basis improvement in gross margin compared to last year’s Q1.
For FY 2012, we are reiterating the guidance we provided in the last earnings release conference call. Revenue growth between 5% and 10%, gross margin expansion of about 100 basis points from the average of 2011, G&A flat to up slightly, and a strong conversion of incremental revenue to operating profit. So 2011 was a solid year and 2012 is looking even stronger.
Now, Rory, back to you.
So before I get to questions, I don’t want to be repetitive here, but I think we’re growing again. Our costs are in line, restructuring is coming to a close, and 2012 momentums are starting to build.
So with that, let’s open the call for questions.
Great. It looks like our first question, we can open it up for Vincent Colicchio with Noble.
Vincent Colicchio – Noble
Perhaps you could talk about the customer environment. Overall, have there been any delays, any changes in sales cycles? And if you could talk in particular about what the tone of business is like in Europe that will be helpful.
Yeah, easy to do, Vince. Just to remind everybody. First, we are a fixed expense for most product release cycles, or most international market presence. So if someone sells 1 million copies of something or 5 million copies of something, they generally have to spend with us. So we’re not as – we don’t enjoy the upside and we’re not as punished on the downside if there is a softening of demand. I think that’s first. Second, because we’re also focused on export market, so European companies exporting to Asia, American companies exporting to Europe, we also have lots of interactions with lots of combinations.
And the third issue is we have a lot of different end markets, from aerospace to technology, to life sciences, to retail. So given all of that, it’s very difficult to really give you one sort of sound bite answer. Generally, we’re still seeing things are quite firm, and I can’t disassemble whether demand is solid or we’re just executing better. But I’ll also remind you that only about 12% to 15% of our customers or client base is non-U.S. So a lot of our business is still American companies addressing export markets.
So in general, I think if we’re to say – if we’re to see any softness, it might be around the big tech, the old tech players as they begin to reassemble or redress their product portfolios moving from on-premise software to cloud-based activity. So that may be – and that’s more hesitation of product cycle rather than market demand. Sorry for the long answer there, Vince.
Vincent Colicchio – Noble
It’s helpful. Thanks. And then, could you talk about how revenue concentration may change in 2012? Will the top 10 decline? And then also mix by industry, will we see tech actually decline? Finally, you’ve done nice job diversifying things.
Yeah. I don’t expect much change in the top 10. I mean, if you think about our top 10 customers, they’ve always been about 50% to 60% of our revenue here, because we get big customers and we grow them.
And also even when they have some difficulties – we have a large cell phone handset manufacturer based in Finland that, as we all know, had some difficult times last year. And their revenue to us was only down 5% to 8%, if that. Not even that, maybe as Sara is pointing to the screen here, it was 1% actually.
So our tradition has been tech. I’m actually very enthusiastic about two geographic areas and subsequent industry areas. One is that whole Midwestern part of the United States from Detroit all the way down to Cincinnati, if you will. With the resurgence of the car industry and also the heavy equipment industry, we’re seeing lots of strength in that area.
And also we’ve strengthened our sales force in Germany as well, because I think the Germans really have – and that’s mostly an industrial economy. They have great export orientation as well. So we’ve had great year-on-year growth from heavy equipment manufacturers and jet engine manufacturers. So we’re seeing a firmness around the economy.
Vincent Colicchio – Noble
Okay. I’ll go back to the queue. Thanks.
Great. Thanks, Vince.
Thank you. The next question is from the line of Jason Kupferberg. Please go ahead, your line is open.
Hi. This is Amit Singh for Jason Kupferberg. Actually I just wanted to – on the same line as the previous question, I wanted to ask how is your pipeline looking. I mean, I know you gave guidance for the first quarter. But how is the pipeline for various areas and verticals, and do you foresee any further investments in the different verticals in coming quarters?
Yeah, I think two questions you’ve got. The pipeline issue, as I mentioned, our pipeline remains very, very firm. There are lots of opportunities, and as I mentioned, the only real transition has been among big tech, as they begin to perhaps soften their emphasis with their old products and begin to emphasize things that aren’t really to market yet on their newer architectures.
We expect in 2012 about two-thirds of our growth should come from existing accounts, and that’s new programs and new divisions, and about one-third of our growth from new clients. Also, every year one or two of our customers gets purchased, and then there is a consolidation process and sometimes we come out on the right side of that vendor consolidation, sometimes we don’t. So you might see one or two in the top 20 shuffle around a little bit. But in general we’re seeing great firmness and solid end markets. We’re emphasizing the non-techs, I would say, more than the techs, that’s where we’re seeing strengthened demand now.
All right. Thank you. And one quick question. Is there a general shift in the business now from – away from maybe small project-based work to focus more and more towards multiyear agreements to bring a little more – to take out any lumpiness, sort of?
Right. Two things; the first answer is yes, and the second answer is no. On the first answer is, yes, there is a definite shift towards multiyear agreements with customers, and that’s something we’re focusing on. We do much better with multiyear agreements. We can drive out cost and achieve joint savings for ourselves and for our clients. The lumpiness question, even though you have a solid relationship with the client over multiple years, underneath that they still have product release cycles. So that you may get a very strong one or two quarters, and then you move into maintenance mode before you get another strong one or two quarters. So it softens the lumpiness. It doesn’t eliminate it.
All right. Thank you very much.
Thank you. The next question is from the line of Kevin Liu. Please go ahead. Your line is now open.
Hi. Good morning. Just a couple of questions, on guidance first. So you mentioned in the press release sequential ramp in revenues from Q1 to Q2. And I was just wondering if the degree of that ramp would be similar to what you guys experienced last year, given that, I think, Microsoft was anticipated to come back as a bigger customer in the first half of the year. Or whether you would expect it to be a more gradual ramp throughout the course of the year?
I think that, Kevin, as you recall, we had a very aggressive ramp in the second quarter of last year, I think it was up about 13% sequentially, and Microsoft was quite strong. I think they contributed about $4 million of sequential revenue growth of last year. I think this year we probably don’t expect to see the same level of sequential growth from Microsoft, but the rest of our customers will probably grow about the same rate. So it will probably be not quite 13%, but probably the historical rate is somewhere around 9% or 10%.
Got it. And then – the comments with respect to where the existing – where the growth would come from, from the existing versus new clients, was helpful. I guess, how much visibly do you have into your existing customer accounts in terms of what they’re planning for the year? What are kind of the odds you bake in that – some of that spending or project might actually go away over the course of the year?
I think that we actually have a quite a lot of visibility, because we are part of the – now in this world of simultaneous worldwide release, we have insights months before you get RTM, or release to manufacture, or even for some large software companies before you go to public beta.
So it’s really, in our tech companies, it’s like any software company. If the code’s on path, we’re in good shape. The more mature companies tend to run a little bit tighter shop. And when they say they’re going to have something in June or July, it happens in June or July. In fact, one of our large contracts we won with GM, we won it last year and the ramp is starting right on schedule, but it will peak in 2013 for this particular product.
So as we shift to the mature customer base, I think we’ll probably get a little more visibility into our revenue line.
Got it. And I know there’s been a lot of focus in expanding outside of the tech vertical, but maybe if you could just talk about what you’re seeing within the tech vertical. Why aren’t there more opportunities for you guys as either the larger traditional vendors might want to shift their focus to the cloud, or you have a lot of upstart cloud companies that may be looking to push internationally. Do you see that as a sizable opportunity for you guys to go after?
Yeah, I do. First, we have – a lot of our large tech companies did grow with us. I don’t mean to say that they’re not growing. But I think that there is a pause of refreshes we’re seeing as the old products perhaps are moving into maintenance mode and they are re-architecting or rebranding new releases.
So we are seeing more inbound inquiries this year from large techs than we did last year about new applications. And they sort of center around things like mobility and things around cloud applications. So we’re at the early stage of big tech really transforming.
And on the smaller, newer accounts, we like to focus on those, but I actually like to be the second or third provider to a tech company. Because the first one or two, these companies aren’t very sophisticated in their European or global deployments. And I’d like to come in after they skin their knees a little bit around the world and have their internal systems a little bit more stable.
Last year, we had about 53 customers that were greater than $1 million with us, and that was 6 more than 2010. So we are beginning to see more larger customers, and they’re the ones that really take advantage of the infrastructure and the knowledge we’ve built.
Got it. And then maybe switching gears for the last question here. Just curious if you could provide an update on where software revenues were from your two SaaS solutions in Q4, and where you might expect that to contribute to fiscal 2012 revenues?
Yeah, I think we’re still at that rate of a couple of million bucks for the years here. As I said, SaaS grows slowly. We’re getting more subscribers on to the Translation Workspace platform.
GeoFluent, as I mentioned, is taking us a lot longer than we had anticipated. It has to do with some of the customization issues. But more than anything else, it’s the reconfiguration of our clients or our prospects’ internal systems.
So I think we’re looking – we hope to end the year with this $5 million to $6 million run rate. I’ve put some – I re-architected that group, put some new management in that group.
And there’s good interest. I have to say there is lots and lots of interest, because of the cost savings. But we’re finding these companies have to re-architect their internal opportunities, their internal systems to achieve those cost savings. And that’s something that we missed in our business planning.
Got it. Thank you.
Thank you. The next question is from the line of George Sutton. Please go ahead, your line is now open.
Thank you. My name sounds so much cooler as Sutton.
We (inaudible), George.
The 17 new engagements that you announced, that number kind of struck me, and I didn’t have a comparative sense. Could you give us a comparative sense quarter-over-quarter, year-over-year?
Oh, gosh, let’s see. As I said, we’ve got 53. Is that more – I don’t know if we have it for 2010 handy here. It’s definitely more than 2010 by – is it more by 6, is it more by 10, is it more by 5? Somewhere in that range.
But I think more than anything else, the number that I’m really focused on here is 50 customers with greater than $1 million a year, 6 more than 2010. Six customers more than $10 million year, 2010 was also six.
So we’re beginning to get that next class of $10 million customers growing here. So the big guys are staying stable with us, and that next class is growing, George.
So I wanted to think about your guidance for 2012 a little bit in this context. You mentioned that, net of your number one customers, your revenues grew 10% last year, which meant there was about a $16 million plus headwind.
And you’re suggesting as it looks going into 2012, you’re not going to have that headwind, which would suggest that the upper end of your revenue guidance is actually a fairly conservative assumption. Or it at least assumes the rest of your customer base is similar to last year.
Can you kind of work with me on that thought process? Does that make sense to you, as you look – I assume there are scenarios where some of these customers can continue to ramp at attractive levels, and actually that high-end high guidance could ultimately be not only achievable, but possibly a bit conservative.
Got it. I think a couple things. First, I don’t want you to lead me where I don’t want to go. But secondly, I’ll tell you, we had a $8 million headwind with Microsoft last year, not the $16 million in your math. And Don and Sara can work with you after the call, if you really want to get that area going there.
And the second real issue is the volatility of currency throughout this year. I have to underscore, we track the five – I guess I’m showing age here – I used to call them money-center banks. I don’t know what you call them now – but five big banks on their forecast just for euro/dollar. And we have a swing of almost $0.25 between high to low by Q4 in their forecast.
And so that’s why we’re trying to be a little cautious here. Because as you know, if the dollar – if the euro weakens, our costs are much better, but our revenues are dampened a little bit. So we have a strong dollar bias. In addition, we also have some activities in – the zloty and the rupee have also been quite volatile recently, and that’s really helped us with our cost profile.
On the revenue line, we’ve got a lot of good customers in the pipeline. I would just rather be cautious for another couple of quarters here, George, before I start ringing the bell.
Lastly, you’ve been using some different terms in terms of industry, and I noticed retail came up a little bit more than it has in the past. Has something new happened on the retail side?
Yeah, we’ve been focusing on retail. We’re finding that as the global brands that have terrestrial stores, they’re now beginning to move to the web. And as they move internationally, there is a whole activity around their e-commerce sites, all their training that requires for all their employees.
And particularly when you go into Canada, of course, which is the first stop for many U.S. retailers, is they need a lot of the cultural knowledge that we have to interact with the language bureaus of Canada.
In addition, we have this global marketing operations piece, and I should explain that a little bit more clearly. Essentially, that’s when customers outsource their entire global website maintenance – that’s content and translation and operations – to us.
They might have five or six countries. Each has chosen a different web content management system. They’re unable to do this through technology, nor do they want to, because you need local content as well as the global branding. So they’re outsourcing the maintenance of these sites to us, where we actually author, manage campaigns for people, and translate the global content.
So it’s broadening our offering. And in that sense, we’re sort of compatible to a lot of the global digital agencies that do the creative. And we’re actually doing the execution of these campaigns for people around the world. And that really fits in our global infrastructure.
So that’s more retail-oriented as well.
I appreciate it. Thanks, guys.
Thank you. The next question is from the line of Richard Baldry. Please go ahead, your line is open.
Thanks. You sort of pinned down the first-half rev guidance between giving Q1 and then the sequential ramp of about $10 million. Can you talk about sort of the broader factors that will give the swing to the second half, and sort of what seasonality you expect there?
In the last year or two, revenues have peaked in Q2. With some of the offsetting new programs, could the second half actually see higher revenues than we’ve seen in the Q2 period, or do you think the same seasonality? Thanks.
Yeah, I think that it’s – you do the math and second half looks firmer than the first half. I’m unwilling to go out there, but as I say, we have different end markets, we have different offerings and we’re seeing a general firmness in our customers’ activities. We have won a lot of projects, Rich, that won’t start ramping until Q2 or Q3. So I’m hesitant to give you anything other than just qualitative activities that, it’s feeling firm this year, but then the year isn’t over. And I also don’t know what’s going on with this – between the election in Europe, whether it’s going to be a caution for investing during 2012. Those are the two areas I’d be a little nervous about, but again we’re fixed expense, so the only way people can stop spending with us is if they stop distributing their products in the core market.
And just to a fast run-through on the math of your conversion expectation for the year. I think you said 30% of incremental rev. So if you’re adding 5% to 10%, or $20 million to $40 million plus on the revenue side, do you think that the operating income line can see an improvement of $6 million to $12 million, right?
Yeah, that’s about right Rich.
Great. All right. On our screen it says that Rich was the last. So great, everybody. As always, if you have any questions, please give Sara a call, and she and Don can help you walk through your models. And thanks for attending the call and look forward to talking to you during the coming year.
Thank you for participating in today’s conference. You may disconnect now. Thank you.
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