Lionbridge Technologies, Inc. (LIOX) CEO Rory Cowan on Q2 2016 Results - Earnings Call Transcript

Lionbridge Technologies, Inc. (NASDAQ:LIOX)

Q2 2016 Earnings Conference Call

August 4, 2016 9:00 AM ET

Executives

Nancy Cosimi – Investor Relations

Rory Cowan – Chairman and Chief Executive Officer

Marc Litz – Chief Financial Officer

Analysts

George Sutton – Craig-Hallum

Vincent Colicchio – Barrington Research

Kevin Liu – B Riley

Operator

Welcome and thank you all for standing by. At this time, all participants are in a listen-only mode until the question-and-answer session of today's call. [Operator Instructions] This call is being recorded. If you have any objections, you may disconnect at this point.

Now, I will turn the meeting over to your host Ms. Nancy Cosimi. Ma'am, you may now begin.

Nancy Cosimi

Thank you. Welcome to the Lionbridge investor call to discuss financial results for the second quarter of 2016. During this call, we may make certain statements that may be considered forward-looking statements under the federal securities laws, 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, the factors that may cause such differences.

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

Rory Cowan

Great. Thank you, Nancy and welcome, everyone. Today, I'll talk about Q2 results and our outlook for the second half of the year. I'll also talk about our recent reorganization in two vertical business units and the benefits of this reorg as we shift our focus – of the business to individual end markets. So, let me summarize the quarter.

Q2 revenue was about $144 million and it was record revenue for the quarter for the company, but it is about 1% below expectations, and this was largely due to some pretty fast spend adjustments in our European customer base, specifically around banking and industrials. I will talk a little bit more about that later. This flatness seems to be in line with others in the European translation industry, there are couple of competitors that have already announced, as well as the general outsourcing industry in Europe.

And also we're feeling the impact of our recent worldwide sales reorganization to move us into an SPU market based model, which I will detail shortly.

Looking at the business, excuse me, sequentially we grew about $8 million or 6% from Q1, this was driven by ongoing momentum in the marketing services areas and are on demand platform, as well as our typical Q2 uptick from a Microsoft, which was also positive.

For all the newer offerings and a core appliance seemed to be meeting plan. The underlying revenue trend is positive with stability among large accounts and a well balanced portfolio of clients across multiple offerings, geographies, and verticals. And after a few months of disruption our sales organization is now complete and again we've reorganized in nine SPUs, which I'll talk about little bit later.

And judging from the number of recent new winds is clear that our teams were energized and focused on growth and I'll talk about some of those as well.

Turning to margins, our Q2 gross margins were 34.1%, an increase of about 130 basis points from Q1 and in last year's zip code. As many of you know, revenue volume is really the primary driver of gross margin growth and our positive sequential margin trend underscores this.

GAAP EPS was about $0.07, non-GAAP was $0.14 while we drove strong sequential operating earnings growth of both GAAP and non-GAAP earnings were down year-on-year, largely related to two below the line expenses, which totaled about $3 million. The first was a $1.3 million unfavorable currency related variance, which given the volatility of currencies during last quarter, it was little bit larger than we had expected, but that's where you are, that's our balance sheet revals. And two is a $2 million tax variance a year-on-year for tax accrual and of course that's suggesting that we're going to have a very strong second half of profitability as well. Marc will explain these in far greater detail, but these negatively impacted earnings by about $0.06 compared to last year and he'll have a lot more detail for you.

Looking at adjusted EBITDA, we delivered about $14 million in Q2 largely flat year-on-year, but sequential growth of about $3 million and this marked a 43% conversion of incremental revenue to EBITDA sequentially, and that's before the full realization of our cost actions, which is we have been talking about are beginning to show in Q3 and Q4 and a little bit in Q2.

Balance sheet and cash flow are remained really in great shape. We generated $8 million of cash flow from operations in the quarter and I think that's close to a record. We continued our aggressive stock buyback program spending about $3 million in the quarter and about $12 million in to-date in share repurchases. We maintained cash at about $25 million and debt remains at comfortable level, that's been about flat sequentially. So, overall, I think Q2 is a solid, but not distinguished quarter largely based on some of the European volatility and taking the sales force out of the field for a week for the reorg. We delivered record revenue, strong sequential growth in our earnings, cash flow remain strong.

So, let me touch on the recent reorganization that we have been working on. You may remember, our strategy over the past few years has been to diversify revenue to new offerings, specifically with marketing services regarding great traction there [indiscernible] into new verticals. We done that successful in areas such as legal with some tuck-in acquisitions, adapt new revenue acquisition models with our on-demand, of our sales driven platform and to reduce customer concentration. This strategy is continues to be successful. Revenue streams are broad-based across a variety of offerings, geographies, and verticals, but is giving us greater stability in an uncertain market. We also diversified our revenue, so that no one client now is great than 15% of revenue, in notable shift from three years ago, when Microsoft was almost 25% of our revenue line.

As we diversified our revenue, we also reduced our expense, shifting our cost structure to a more efficient, sort of, off shore model, with maintaining G&A throughout these past couple of years. We have aligned our costs, diversified revenue, and maintained stability within key accounts. Of course, the last phase of business transformation is org design. And that's what we just completed in Q2 of this year, and let me give you some context.

Our segmentation was just not tightly aligned. Historically, we've been organized functionally. Global sales, global operations, global technology, and functional organizations are typically designed for control, but often this constrains growth, as cost begin to creep in as each function adds people to coordinate internally, responsiveness tends to deteriorate as approval cycles have to go up many levels through many functions. And I think that this was constraining our responsiveness and our growth, and as we migrate to new end markets, we really need to focus on those markets with great clarity and ownership. And so, that's what we addressed with this re-org, a better balance of both growth and control.

And to enable this cost efficient company, so we can, really get move this company to the $1 billion, three-quarter of a billion dollar level over the coming years, functional orgs just don't scale. Traditionally, the choice is of course are organized around offerings or organized around geographies or organized around end markets. And we choose market in the U.S. and GEO, in Europe, which is a pretty traditional model offer scalability.

So, we now have nine individual business units, with senior leaders or general managers responsible for the full P&L from revenue, all the way down to a net income or to profit, this allows us to create a far more a vertical strategy with focused sales, marketing and operations, aligned with target markets. This moves, of course to decision making, far closer to the customer, this means our team is going to be more responsive to client needs without the complexity of managing up and across, so better decisions can be made on better bids and better offers.

This also we're finding already as identifying further areas of expense management, our GM is now responsible for the full P&L, they are finding that they really don't need as much of the sort of corporate context, as they thought they did, when they didn't have to pay for it. So we're expecting greater cost controls go into 2017 as well. This also provides a structure for an effective targeted acquisition strategy, now I have places where I can plug-in the smaller acquisitions, and they can report to a GM for a faster integration that really aligns offerings, cost models and the cultures.

I had originally plan or we had originally planned a cautious migration into this model and migrating through the year, and announcing it next year, but we just decided with the mandate often get it done during the quarter, we chose the model, we made the change, and we drove clarity a pretty quickly. And this is what we did last quarter, it now feels as if, we have sales people aligned in the right verticals, in the right geographies, we brought everybody in a day at 200% global leadership meeting in May, here in Boston, and we have remapped all 6,000 employees to this structure. So we have the high level structure in place, and now of course all the BI stuff have to come true which will happen during the next four months to six months.

And so this cause some disruption in the short-term, I know you take your sales force out of the feel field for a week and you lose some momentum in spite of everybody's reassurances, but we did achieve a number of very strong milestones during the quarter. We continue to grow our marketing services business, which remains on track for 10% growth or reaching almost a $100 million this year. We secured large scale new wins with what I'm calling these consumer cloud companies; Netflix, Airbnb, Amazon and these are already ramping and have to with further growth in 2017. We increased share at many of our large existing accounts with new programs at Google, Apple, VMWare, all of which are positing strong growth year-over-year, and we maintain stability at Microsoft, our largest. In fact, we've recently secured a number of new wins including in the gamming sector at Microsoft. And we renewed one of our largest engagements there on a three year contract, so Microsoft remains stable and on track.

Finally, our onDemand platform marked its strongest quarter ever with about $1.7 million in revenue and gross margins of over 50%. Now as you may remember, onDemand is our new translation as a service cloud based platform, a fully automated online platform for project submission, pricing and delivery, and onDemand continues to be strong channel for us to capture the decentralized spend at large organizations while our enterprise sales force focuses on the centralized spend at large organizations. It continues to grow at an impressive rate and is on track to exit the year at about $10 million as we have projected.

Also more importantly, the underlying technologies for onDemand and processes allowed us to win at these consumer cloud companies, so the underlying technology for processing a small files in a highly automated cloud based fashion are what we're using to win these new cloud companies as they are having trouble scaling with the traditional localization response model.

So in the midst of the cost reduction and reorg, this new strategy for new offerings, new verticals and new channels really remains on track. While these are – while these trends are positive, if you saw in the release, I'm being pretty cautious about our outlook for half two, due to a couple of headwinds. First, the Brexit related hesitation, many of you called in when that was announced. And of course, just on a currency view, we have about $40 million, $45 million of revenue tied to the British pound. So a 10% move in the pound is about $4 million of headwind on revenue.

In addition, we're building some conservatism into the second half as we anticipate continued pull back in spending until the uncertainty in the region dissipates. And this is, we're getting some indications of that, but a lot of this is just our judgment here that, it just there that off-swing from [indiscernible] and Europe of course.

Then secondly in Europe, the larger issues is the sales momentum in Europe, which is not as strong as we'd expected. In particular, the center of gravity around the banking sector in Switzerland and Germany, we've all been reading about this in the headlines and in fact our offerings there you're seeing extreme cost management in these banks from reducing research reports to reducing daily briefings, all of these sorts of global offerings that we were providing them. And a little bit of softness in the industrial sector in Germany and that maybe just account specific. But I don't want to globalize about German economic activity although, with our business we do touch so many sectors in the world, we're probably a pretty early indicator of sort of what's going on.

So despite this dampened outlook in Europe, which Mark will detail shortly, our earnings outlook for half two remained strong. Margins continue to improve and we expect SG&A expenses to come down significantly in half two as the cost to actions we've implemented really take hold and fortunately we did most of those cost actions in Europe, so you are going to see those begun to shed in half two. And the goal of 10% EBITDA that we set out two years ago is still within reach, in spite of this softness in Europe, because of our proactive cost actions. We expect ongoing cash flow, which will almost double this year from last year, as the year progresses in spite of the challenging top line.

So in summary, Q2 was solid, but not distinguished despite the disruption in reorg and some weakness in Europe and I'm trying to disaggregate, what's market-based demand and what was short of self-inflicted, with our desire to just get this reorg behind us within the quarter.

The underlying trends in the business, do remain really relatively solid. We're growing many of our large accounts, we're driving new businesses with emerging growth clients, the new org structure [indiscernible] really allowing us to accelerate this vertical market strategy and we'll really see the benefits of that in 2017, as we go through the planning process in half two. And despite some conservative in half two revenue outlook, earnings growth and cash flows are really remained strong.

So, let's turn it over to Mark and he will give you all of the details.

Marc Litz

Thanks, Rory and hello everyone. Today, I'm going to walk through our Q2, financial results and also provide an update on our outlook for Q3 and the year. Let me start with an overview of Q2.

First, revenue. In the second quarter, we delivered revenue of a $144.2 million it's about flat from last year, but up almost $8 million or 6% sequentially from Q1. Revenue in our GLC language and content segment was $106 million, an increase of $3 million year-on-year. And revenue on our GES test segment was $35 million about flat with last year. Lastly, Interps was $3.3 million, an expected decline of about $2.5 million from last year, reflecting the impact of the unprofitable DOJ contract we exited at the end of last year. In terms of clients, year-on-year, we saw some healthy growth in Google, Amazon, VMware and a popular west coast personal device company and many of these are new programs for marketing services.

So the strategy for moving into marketing services continues to be the right path. And our legal vertical is also growing on plan as revenue from our Geotext acquisition more than offset the exit of a DOJ contract. So we continue to have a well-balanced portfolio of clients and our strategy is working. We are growing our tech verticals as you move into marketing services and growing several key non-tech verticals such as legal. Unfortunately, this growth was offset by pockets of weakness in Europe as Rory had mentioned including declines from UBS, Airbus and Volvo.

Now onto margins. Q2 total company gross margin was 34.1%, largely flat with last year, but up 140 basis points sequentially from Q1, reflecting the volume uptick. Our GLC margins were healthy 36.1%, GES was 28% and Interps was 33.4%. Going forward, we expect margin to continue to strengthen with the benefit of our recent cost actions.

Moving down the income statement, operating expenses in total were down year-on-year, largely due to lower restructuring. And that's in spite of Geotext SG&A expense being added into the system. So our cost actions are starting to have an impact. We did have some one-time expenses in Q2 to drove up SG&A in the quarter including the worldwide leadership conference in May that Rory has mentioned.

Moving forward we expect both sales and marketing and G&A to return to Q1 levels and come down even further in Q4 as our cost actions continue to benefit SG&A. Restructuring and related expenses were about $1 million in the quarter including a non-cash accounting adjustment related acquisitions.

As you wind down restructuring and the benefits of cost action show through, we're driving strong income from operations. In fact, our income from operations up 35% year-on-year essentially on flat revenue. As you look below operating expenses in Q2, we had interest expense of about $600,000 in the quarter and about a $1 million of other expense related to the effective currency on monthly balance sheet revaluations. Given the inter-quarter volatility, a few currencies worked against us and well over half of that was of course the British pound.

A tax provision of $1.4 million in the quarter, we suggest modeling about $1 million to $1.5 million of tax expense dollars per quarter in the second half. This flow from tax provision in Q2 reflects our anticipated strong pre-tax income levels in the second half and for the full year.

Combined out tax and other expense variances year-on-year totaled about $0.06 negative variance as we had some one-time benefits in these areas last year. For Q2 comparisons are tough, but moving forward there should be less of an issue given the recent currency stability in a more normalized tax provision in 2016.

With all these factors, GAAP earnings were $0.07 and non-GAAP adjusted earnings were $0.14. And for those of you track adjusted EBITDA, we drove about $13.7 million for the quarter, which is a 43% sequential conversion of incremental revenue to adjusted EBITDA.

Moving to the balance sheet and cash flows. Future operating cash flows is very strong and almost $8 million in the quarter, more than 50% improvement over last year, and that's after paying $1.5 million in the quarter to exit a vacant office lease we had in Europe. By negotiating this favorable lease termination, we'll reduce our operating cash consumption going forward and we expect cash flow to remain strong for the remainder of the year.

Moving on to DSOs, there are 54 days in the quarter, a decrease of 3 days from last quarter, reflecting the ongoing operational discipline of our global ops and finance teams. Capital spending was $2.6 million in the quarter as planned, again for the year we expect CapEx to run about $10 million, roughly consistent with our prior years’ experience.

We ended the quarter with about $25 million in cash and that was relatively flat sequentially at a $103 million. Net debt is about $3 million less at the end of Q2, it remains comfortable at about $78 million. During the quarter, we repurchased over $3 million of stock bringing our half one total up to almost $12 million. And since, the $51 million of buyback was announced in November, we've been able to reduce our outstanding share count by 3% even after our annual grants in Q1.

And I'm very pleased on how we're managing the balance sheet. And this amounts the priority that I outlined earlier this year. Cash management, cost management and supporting our new work structure for growth. And we are on plan to migrate finance into a shared service model later this year, which will add further savings in 2017.As you look at uses of cash going forward, we'll continue to support our stock repurchase plan, we'll also have flexibility to fund additional acquisitions as appropriate or pay down some debt.

Next, let me talk about our outlook for the third quarter. We're estimating revenue of a $135 million to $145 million for Q3, reflecting traditional Q3 seasonality, but more intuitively, some instability around Europe and the banking and industrial sectors and the impact of Brexit. With the sales force still aligned, there are clearly areas of upside in strength for the late quarter wins we've secured, but it seems appropriate to be cautious in our revenue outlook for half two.

On the earnings side, we do expect solid adjusted EBITDA growth in half two resulting from higher margins and lower SG&A, largely resulting from our cost actions we've taken over this year. This means for the full, we'd expect revenue to be largely flat with last year. However, in the earning side, we expect adjusted EBITDA growth of 10% and more year-over-year due to the expected cost reduction and margin expansion in half two.

Despite the real disruption of remapping 6,000 employees into our new business units, and revenue headwinds for this year, we remain committed to strong earnings growth. With our comp plan for 2016, we will increase EBITDA nearly 50% over the past two years since 2014, reflecting a 200 plus basis point increase from where we were two years ago. And that just translates into free cash flow in the low to mid-20s for the year, a significant improvement over the $12 million we had last year. So we have a proven platform for ongoing earnings growth in half two in 2017. Rory, back to you.

Rory Cowan

Okay. Thanks, Marc. So, in Q2, despite the twin warriors of the sort of reorganization efforts and the weakness in Europe, the underlying trends in the business do remain solid. We're growing many of our large accounts. And I am particularly pleased that we won a couple of these new cloud consumer companies as they realize that for their own scalability, they have to sort of plug into their – to our scale of platform rather than using a series of smaller players other than themselves, so that's a heartening trend.

On the new work structure really is allowing us to accelerate our vertical markets strategy and knowledge, and hopefully – not hopefully, we know and we've done this before as you'll see, by the middle of next year, we'll have a great intimate knowledge of our end-market customers owned by a GM that really should allow us to make better decisions faster. And despite some conservatism in our half two revenue outlook, earnings growth and cash flows remain strong. So, let's focus on this underlying positive trends and the last of phase of our business transformation really is complete, and I think that the business will get back to growth in 2017.

So, with that, I'll open the call for questions.

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Speakers, our first question is from George Sutton of Craig-Hallum. Your line now is open.

George Sutton

Thank you. Rory, I appreciate relative to your reorganization that the sales folks were off the street for a week, but I am curious if you could discuss the customer facing aspects of what have changed and how many people have shifted places and how has that potentially affected deal cycles and then also, any sort of change in retention?

Rory Cowan

Yeah. Thanks George, those are good questions. We have about a 110 people on commission worldwide. Those are some PMs or some sold accounts that had incentives based on margin and based on volume. And we have a bunch of new business of sales people. So it took about a 120 some people that were customers facing off the street. And about 80 or 90 people of course, just other types, the potential, the new GMs, put them in a room for three days and really sort of announced the strategy and remapped all of this. In spite of the assurances, no one would lose momentum, it's pretty clear that while people are trying to figure out who their new boss was and what accounts they were going to have and what regions they're going to have that there was a fair amount of just normal human distraction going through all of that.

We have ranked many of the sales people, we've been forcing some turnover. And I think in particular George, you should really ask about the new GMs with these nine GMs that's a big career moment for people when you take them from a functional responsibility to a full horizontal responsibility. Of these nine GMs, we've brought some people in from the outside. We have some people come in from operations and some people have come in from sales. And so Rich Tobin our COO is really, he is comfortable with this model, because when he has digitized of course, that's the model that they had in the holding company model where lots of individual P&L units for faster responsiveness.

So, each of these units, these GMs now are much more customer intimate, we're already in the past couple of weeks beginning to see approval cycles or shortening and this sets the table also for much appropriate pricing models because we're finding that these different solutions we have had very different cost models associated with them and they have very different end market pricing conventions, and so some of these newer premium markets perhaps we have been under pricing and in some of more traditional tech markets perhaps we have been over pricing, and once you categorize by segments a host of data comes out that allows you to run on a far better business. I was getting that data at my level but it wasn't really down the stack enough to allow actual detailed real time decision making.

So, I think in general everyone's – there is lot of energy because there is finally, we closed that sort of a bill authority responsibility loop here and we have the data giving that we're able to give to these GMs because you may recall two years ago I set up this global costing system and we could not have done that, if we did not have our global costing system in place. So this is really enabling both the reorg and it’s also enabling Marc Litz to further reduce G&A cost because now we have more of a centralized cloud oriented model for shared services and things.

So, longer answer than you needed, I apologize but as you can tell we're pretty excited about doing this and we just, we'd have staff meeting here and we're thinking about doing it slowly and doing one BU at a time and we looked at one another and said let's not have a year of disruption or let's have a quarter of disruption and so I think that's what we are – we're seeing.

George Sutton

Now outside of marketing services, where you clearly saw some new customer demand, I'm curious if you are seeing it in the core translations area as well or if you could update us there and relative to some of those newer customers coming in on the marketing services side are they – are they starting to migrate into you core offerings as well?

Rory Cowan

Yeah, George absolutely right. Our core translation of business really is showing some very solid again, and I must say domestically as I said our core translation business in Europe, there's just a – and I don't want to dismiss this, we often see this earlier because many of our offerings are discretionary at some of these businesses and as I mentioned the banks moved very, very fast in cost management, but our Google growth is up very, very well, a large personal products manufacturer noted for their telephones is up very, very strongly traditional text and the security area like VMware is up strongly, EMC is up, Lenovo is up.

So, our core business really feels very positive and I don't want to – sort of underestimate all these new consumer cloud companies. Traditionally, they start out trying to do everything and manage it all themselves and we are finding that they are following the paths of the Google's, the Microsoft's, and others as they outsource to scalable company like Lionbridge because we're just able to plug-in to their platforms and execute at a much, much faster rate for them as they go global in the next phase of their operations and so, I think it's a core business feels a pretty healthy.

Lastly, I don't want to – I want to make sure to we call out our legal business that we acquired is really doing very, very well. We have a one or two large law firms, their involvements in global disputes and that scaling along very nicely and this team is – this really heartened our ability to move to SPUs faster because we brought this team in, really didn't touch it except we sort of consolidated some back office activities. And they began to utilize the infrastructure that we had built offshore to scale for their clients and seeing this scalability of a small business unit building on our platform really gave us the confidence that was time to move quickly along these lines. And so the core business domestically I think I would say is in really in good shape. International has been really juts an uncertain piece where I would say Asia has been up and solid. Local Asia is in the tens of millions for us. So, it's a year so that's not paying a lot because there is not a lot of local demand there for foreign companies, but Europe is where there has been uncertainty and it's really country by country and end market by end market.

George Sutton

I appreciate the answers. Thank you.

Operator

Your next question is from Vincent Colicchio. Your line is now is open.

Vincent Colicchio

Yeah, Rory, what was the international contribution in the quarter and if we exclude Europe, did the business meet the plan?

Rory Cowan

I'll have to get that on the screen here, Mark, what was the international piece, international customers versus currency and et cetera.

Marc Litz

On the revenue side, Vincent, we don't have that right now, we can get back to with that answer in terms of revenue in Europe.

Rory Cowan

Right. The sense is that the U.S. was in solid shape, we had one tech company that was behind plan, where as I look at the screen here customer by customer that was a $1.5 million or something for the quarter. So, it wasn't really much domestically, but I'm seeing a lot of green on the chart here customer by customer, there are largely U.S. customers here as well. So, almost all the red that I see is Europe and Porsche was down. Yeah, Volvo, Rolls-Royce and rest of those. We'll look at that number.

Marc Litz

There are some of the major customers that we can get to in total. We should have had that number for you Vince, I apologize.

Vincent Colicchio

That's fine and how do the margins look on the new customers added in the quarter, versus the company averages in those respective businesses?

Rory Cowan

Sure, Vince, so I think it depends on whether the client has done business before where the pipes have been connected so to speak and those are typically a quicker ramp up for us and a more healthy margins with the brand new client, we're connecting the technology in the back end and getting into their CMS system. There's a little bit more of an investment up front and those will take longer to ramp up to a volume that gets you to the sort of the mid 30s range.

Vincent Colicchio

Okay.

Rory Cowan

So, newer customers is probably six weeks or eight weeks of some margin headwinds. If its incremental business from an existing customer, generally comes in at solid or large customer margins. Remember, we do much better with larger clients scale operations that utilize our global infrastructure are really scale – really works well for us.

Vincent Colicchio

Okay. And the marketing service side, how much did the business grow in the quarter and secondly are there any changes in the competitive landscape on that side?

Marc Litz

I can take the first part of the question, I'll turn it to Roy for the second part of the question, year-on-year Vince marketing services is on plan, it's growing in that sort of 10% low teens range.

Rory Cowan

Right and I think in terms of competitive landscape we're finding as we've seen before it's the more technically sophisticated clients that have the confidence to unbundle so they're not buying translation directly through their agencies. So, on the large scale, these guys are to unbundle, that's going as we thought. What is surprised to us, however, is that many of the agencies that are doing digital marketing are now plugging into our onDemand platform and I think in the last three weeks alone, I just this hallway charter, but I think we got four or five agencies have connected to onDemand. So it seems as if we're getting it directly from the large guys and you could think about agencies are being a channel for the smaller guys. So, it's unfolding, so onDemand and marketing services have this Venn diagram overlap that is really very, very interesting and positive for us.

Vincent Colicchio

And then one last question. What was the top 10 as a percent of revenue in the quarter?

Rory Cowan

It's getting up here.

Vincent Colicchio

And I guess, related to that, I guess [indiscernible] has there been any big changes in the top 10 this quarter?

Rory Cowan

The top 10 for the quarter, Vincent, was 46% of total. The top 7 to 8 aside from DOJ, which we've talked about extensively falling out from last year. There has been some movement and sort of the 8 to 10 [indiscernible] some of these new wins that we've gotten have ramped up and come into the top 10, but the top 7 or 8 are kind of stable.

Vincent Colicchio

Thanks guys. I'll go back in the queue.

Operator

Thank you. Next question is from Kevin Liu. Your line now is open.

Kevin Liu

Hi, good morning. Just in terms of the new customer pipeline, I was hoping you could talk a little bit about that and then are you using any shifts in terms of the rational for going with Lionbridge specifically, your customer still focus more so on expanding in new markets or do you feel like they're starting to approach you most so to save on some cost.

Rory Cowan

Yeah. That's a good question. The new customer pipeline, we are – we've remapped everything and so, I have to say I don't if the data is actually is precise yet, because when you remap the whole world there's lot of noise – the signals of noise ratio is – is out of whack.

Pipelines are strengthening quarter-on-quarter, so that feels good. The newer customers, as I mentioned that's more about transaction management and turn times and our automated global capabilities are what are distinguishing us there. Secondly, because of our geo-effluent capability, for some of these consumer cloud companies, we're doing a lot of content preconditioning if you will, moving it into our MT, machine translation, routing capability and serving it up proposed editing at a very competitive model and so, this is opening up content that wasn't cost effective to translate before, but now because of our combination of global platform and technology, it's adding a new category of content to be translated.

So, think about, a global lodging company or think about a global film company that has – or that they needs a lot of reviews in multiple languages. Net content changes so rapidly, it just wasn't cost effective to use humans only, our portfolio of technologies is preconditioning this content, so those translators are much more effective and are able to bring the nuance and the knowledge of each domain needed. So, that's a change for us with this new group of consumer cloud companies. Traditional competitive landscape it's all the same, except as I mention the banking world and this is global – everything from global research notes to the morning newsletter that used to go out in eight languages from some of these banks. People are pulling back in that area. So, it changes by segment and hopefully when you ask that question next year, I'll have more detail as I talk about each end market for us and I'll have much more structure in those comments.

Kevin Liu

Got it. And could you elaborate a little bit on kind of the changes to the potential pricing mechanisms one, are you already, I guess, moving over towards some new pricing mechanisms in terms of the new customers you are adding and then also one which you expect where this impact be felt either trying to drive higher volumes or potentially extend margins with some of the...

Rory Cowan

Yeah.

Kevin Liu

...premium pricing.

Rory Cowan

Good, good, good question. As you might expect, right now it's quite situational, and it's not quantified. I wanted to get the – I launched a complete global pricing review process to get all of our data analyzed and centralized in anticipation of this re-org and though we've had a couple of presentations that team – we are getting some very real knowledge on individual trends and the variability by segment, by market and by content type is far greater than we thought in terms of market clearing prices or each of the end markets. But we're really findings that the cost for all of those, it does not change that much by market segment and there are also additional services sold by segment from testing and engineering to publishing in the premium markets and so it's a more complicated response than I thought and what I – again, what I like about this is, we're now structuring the business, so I can break a big problem into small problems and act on it.

Kevin Liu

And just last one for Marc, I think you mentioned some one-time expenses in the quarter like the sales event, can you just quantify how much was more so one-time in Q2. And then in terms of SG&A coming down into the back half of the year, how much more is there to be realized?

Marc Litz

Yeah. So I think within the quarter, the event that we've been talking about was in the $0.5 million to a $1 million range, all-in between facilities and travel and everything else. As far as coming down, we've acted on – we've taken these cost actions, executed them largely in Q4 of last year and Q1 of this year. As Rory had mentioned, a lot of its in Europe, so it just takes a little bit longer to get them out of the system. So, really on the back half of the year, you'll see that accretion comes through as those folks [indiscernible] out of the system and that costs really comes through them Q3 and Q4.

Rory Cowan

Right. And Kevin, what will end up in Europe, our goal in Europe really is to have all customer facing activities in each country in local language and the delivery centers largely with centers of gravity to our offshore facilities and we're doing Europe a little more tenderly. We took the back office cost as we mentioned, but the customer facing activity because you really do have to have local language interaction in Europe, [indiscernible] or cumbersome to reorg there than it is in the U.S.

Kevin Liu

Understood. Thanks for taking the questions.

Rory Cowan

Right. Thanks, Kevin.

Marc Litz

Thanks, Kevin.

Operator

Thank you. [Operator Instructions] Next question is from Andrew [indiscernible]. Your line now is open.

Unidentified Analyst

Hey, Rory.

Rory Cowan

Hi.

Unidentified Analyst

Marc, couple of questions. So we talked about some of these cost savings rolling through, just in order of magnitude, can you give us a number of how much you expect to save in the second half of 2016 versus the first half of 2016 from an operating expense basis. And then if I were to look at that on a full-year basis, sort of as a tailwind to 2017, can you give that number as well?

Marc Litz

Sure, I think on – so taking your first question on half two, it's about $2 million to 3 million incremental versus half one and it's a split between SG&A [indiscernible] is kind of all through the statement and that [indiscernible].

Unidentified Analyst

Is that cumulative for each quarter?

Marc Litz

That's incremental in the full half...

Unidentified Analyst

Okay.

Marc Litz

...to half one.

Unidentified Analyst

Okay.

Marc Litz

So, half one to half two is about $3 million.

Unidentified Analyst

Okay.

Marc Litz

And so that obviously drives as we talked about the 10% expansion from 2015, in total that's the large driver there. And so, as far as going into 2017, there is some more that we had going into next year, largely on some of the restructuring that we did in the beginning of this year, a lot of that is coming through in half two. There is another couple of million going into 2017, and there is other initiatives that we're working on like shared services that won't really show up until 2017, and the other part that we've seen with the new SPUs is these general managers, I think, Roy eluded to, if they are really getting into the weeds on their cost structure and we're just starting to see them come back with recommendations on incremental cost savings that were just in the process of figuring out with them so, there is more that we had there as we figured that out in Q3 what that looks like.

Rory Cowan

So, Marc just to be clear, you've got about $3 million in half two, so annualize that $6 million going into 2017 is what your implying. So, we've about a $6 million run rate going into 17 Andrew first, and then second, we've talked about this CLFs part of our plan, there took us about 18 months to move them off of notes, that's going to be happening during Q4 and that should save a million dollars or so. In 2017, coupled with a European shirt – service initiative that we've been actually increasing our spend this year, as we double staff things to move this to a centralized model, and that should add another $0.5 million to a $1 million next year as well. So, you're – you're going to see a lot of this cost actions really begin to the flow through Europe, is just it's a – it's a slow pot to boil.

Unidentified Analyst

Okay. And, I'm sorry, Marc, but I think I missed it on the call, what was the free cash flow number for the first half of the year?

Marc Litz

For the first half of the year, it's – it's going to be about, it's $8 million in operating cash, and it's about $4 million, $5 million on free cash, so as I mention for the full year, we should about double from last year, because we'll have lower restructuring, DSOs will remain inject and, we will have accretion on the – on the EBITDA line.

Unidentified Analyst

Okay. So – so get to the sort of that low to mid 20s number, you're talking about, high teens to low 20s of free cash flow?

Marc Litz

Low 20s – low 20s of free cash, probably high 20s to low 30s of operating cash.

Unidentified Analyst

Right. Understood. So, if you did $4 million to $5 million of free cash flow in the first half of the year, and it gets somewhere around the...

Marc Litz

Yes. Probably on just, – on the back half, yeah so, it will be – it will be high teens, exactly.

Unidentified Analyst

Yeah. Okay. And given that you're comfortable with the debt position, if acquisitions don't present themselves, is it fair to say Rory, that the priority then for cash is continued buybacks given sort of this sustained depressed valuation of the company you have had?

Marc Litz

Right. And this has been, as you would expect, this has been a constant discussion at the Board level here, and again we're trying to balance stock buyback versus entrance into new end markets, and we've got a couple of acquisitions that hopefully will be as strong as the legal one, in the pipeline here or so. That's the balance, but your – your phrasing is absolutely correct Andrew, if acquisitions don't present themselves, continuing our stock buyback is important.

Unidentified Analyst

And I appreciate that you're looking for acquisitions. This is something we've communicated to you privately, but I think it's worth saying sort of publically the nature of your business has been somewhat erratic that it's made it difficult to forecast and as a result I think it's a primary reason for what's been sort of a sustained depressed valuation, given that the public market sort of creates consistency. Rather than looking to make acquisitions how seriously is the board looking at whether or not the company should be part of a larger organization or at least operate outside the constrains of having to sort of forecast quarterly results. Because you guys have made tremendous progress with respect to some of the initiatives you described on the call and there has really been no reward in the market place for management board or shareholders?

Rory Cowan

Right, no I think you summarized it really very well. It is kind of frustrating. This business is a volatile global sort of project based business and I think that is not really rewarded in the public markets. I mean clearly we're public company, so we're for sale every day and our board, that is obviously a topic at every board, but you can imagine it's also a topic at our board as well.

Unidentified Analyst

Well, I think you might want to seriously take that sort of to the next step because unless the nature really changes I don't see the situation reversing itself in a meaningful way and so I think from a shareholder perspective I think it something that really needs to be consider.

Rory Cowan

Great. Thanks. We will be – point noted.

Unidentified Analyst

Thank you.

Rory Cowan

Great.

Operator

Thank you. As of this time speakers, there are no further questions in the queue.

Rory Cowan

Great. Thanks very much, everybody. And again, we're all available for the after calls, and just wanted to introduce Nancy, Nancy is going to be working with Sara in the IR area, so there is a new voice, as Sara is also responsible for our Corp Dev activity here, and just wanted to make sure, that there is some more, more hands, and more people answering the phones, and that's not found. So welcome, Nancy.

Nancy Cosimi

Great. Thank you everyone.

Operator

Thank you, speakers. And that concludes today's conference call. Thank you all for joining. You may now disconnect.

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