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Executives

Rory Cowan – Chairman, President & Chief Executive Officer

Don Muir – Chief Financial Officer

Sara Buda – Vice President, Investor Relations and Corporate Development

Analysts

Amit Singh – Jefferies

Richard Baldry – Wunderlich Securities

George Sutton – Craig Hallum

Ben Rose – Battle Road Research

Vince Colicchio – Noble Financial

Kevin Liu – B Riley

Lionbridge Technologies, Inc. (LIOX) Q2 2012 Earnings Call August 8, 2012 9:00 AM ET

Operator

Welcome and thank you for standing by. (Operator instructions.) Today’s conference is being recorded. If you have any objections you may disconnect at this time. I would now like to turn today’s meeting over to Sara Buda. Thank you; you may begin.

Sara Buda

Thank you. Welcome everybody to the Lionbridge Investor Call to discuss financial results for Q2 2012. 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, 2012, the factors that may cause such differences. And now I’ll turn the call over to Lionbridge’s Chairman and CEO, Rory Cowan.

Rory Cowan

Well good morning, everybody, and welcome. So today we’ll talk about our Q2 performance and what’s really marked our fifth consecutive quarter of strong revenue growth and profit acceleration. I’ll also touch on our new offerings, our new vertical strategy and our new cost platform and then we’ll wrap up with our outlook for continued growth in the second half of 2012.

So first let’s talk about the quarter. As you saw, revenue grew about $6 million or about 5% year-on-year despite a currency headwind. Constant currency revenue growth was almost 9% year-on-year. This increase was largely driven from solid growth in many of our large accounts, and the benefit of a lot of new business which continues to ramp as well. I’ll talk a little more about our positive demand environment shortly, but clearly we had a very strong first half and we expect continued strength in the second half in spite of the global uncertainly we all are reading about.

Secondly, we grew gross margins by 200 basis points year-over-year to 32.4%. This reflects really solid growth across all of our segments. And operating profit for the quarter was almost $7 million excluding one-time items. The underlying profit potential of the business is really becoming evident now.

GAAP earnings were about $2.5 million or $0.04 per share and that includes $6.7 million of European restructuring expenses, impaired items related to real estate technology which I’ll talk to you about shortly, and some one-time acquisition costs. Non-GAAP earnings, which exclude these items, was about $11 million or $0.18 per share.

This is our strongest adjusted earnings quarter ever, and when you adjust for the $3.2 million tax benefit our non-GAAP earnings were still a record $8 million. So clearly we’re seeing strong profit momentum no matter how you look at it.

Finally, we continue to generate cash. This quarter we generated about $6.6 million in cash flow from operations and we paid down $4 million of the $10 million in debt related to our PRI acquisition we closed on June 1. All in all, Q2 marked a very strong quarter. We’ve seated our earnings and revenues forecast once again with solid growth across all in-markets and we delivered our highest adjusted profit in history.

Let’s talk a little about our demand environment and our strategy for continued long-term growth. First, we have a lot of new offerings, particularly our GMO or global marketing operations solution. Second, we’re reconfiguring our go-to-market strategy around new vertical market expansions; and third, we’re getting some strong growth from many of our large existing clients, and this is that recurring revenue model that we focus on here so much.

Let’s go into some detail on each of these. Our GMO, or global marketing operations – and as a reminder, with GMO we create, deploy, and manage digital marketing programs across all geographies and technical platforms. So it really is technical knowledge and content knowledge in a global deployment to maintain everything from advertising campaigns to general websites for people. We launched GMO last year as we saw a growing demand from marketing executives who struggled with the complexity of managing campaigns globally.

The other unique thing about GMO is that we’re moving from a product-oriented decision maker in large organizations to a market-oriented decision maker in large organizations. The value proposition for GMO is much broader than a traditional translation solution and involves a variety of global capabilities. GMO is now on track to generate more than $10 million of incremental revenue in 2012 over 2011, and clearly it’s one of our strongest growth areas. And with GMO we can command a value-based pricing as we accelerate our client time to market and reduce their total costs.

So it’s getting significant traction in 2012 and should drive further growth in 2013. I think GMO is another example about how Lionbridge really excels in all aspects of the global digital publishing lifecycle. We do this for websites, we do this for advertising campaigns, and as products and websites merge our product knowledge and our web knowledge and our globalization knowledge are coming together for the newly-architected global products as well.

So that’s some of our new offerings; now let’s talk about our new vertical strategy. This is really the second factor behind our momentum. A few quarters ago we decided to align our Sales and Operations Teams to focus on certain end markets that we considered to be momentum verticals with strong growth opportunities, and in particular we’re adding life sciences and manufacturing to our end market verticals.

Both sectors are driving notable growth throughout this year, and in fact our Life Sciences Team grew about 20% in the first half of 2012 with growth from large pharma clients, global contract research organizations, and medical device companies. And the new business is accelerating as well. It takes about nine months from first call to when you close an account, and about another nine months for it to ramp so this is a strategy where we’ll really begin to see the benefits of it in 2013.

As I said in our last call, we believe the manufacturing vertical also offers strong growth opportunity. In Q2 we continued to see strong year-on-year growth from our manufacturing clients such as Caterpillar, Cummings, Rolls Royce, GM, others. These clients develop, distribute and document products that are increasingly digital and increasingly global. One of our customers said that the bridge of a tugboat now looks like the bridge of an all-glass cockpit in a 747, so you begin to see how digital technologies are invading the electromechanical industries in the United States.

To support this growth, our organic growth in this sector, we announced the acquisition of PRI, a leader in technical engineering and documentation for US manufacturers. To remind you, PRI is a profitable company that generates about $11 million in annual revenue and that’s a very nice tuck-in. It gives us strong long-term relationships with several manufacturing clients in the Midwestern US. So we’re excited to have opportunities with PRI that bring us to these new markets, and we’re delighted to have the PRI team join Lionbridge.

Let’s talk about our existing clients. Much of our growth of course comes from existing clients and let me touch on some of the top ten accounts, because I know you’ve all had a lot of questions about them. Microsoft was solid in the quarter with strong sequential quarterly growth but about flat from where we were year-on-year. It seems that our relationship with that account has stabilized and that really means that it’s firming again as they go through product lifecycles, but more than anything else this relationship reflects our new strategy of less product-orientated work and more digital marketing activities.

Google, our second largest client continues to grow steadily as our unique global sort of crowd in the cloud model helps them capture and grow revenue in local markets worldwide. As we looked at other growth accounts during the quarter it’s clear that the consumer tech market continues to be strong, from Samsung to HP to a well-known West Coast personal device manufacturer. So we continue to expand our strong base for current revenue across a variety of end markets.

Let’s talk about Europe. A lot of you have asked us about what’s going on with Europe and sort of more specifically are we seeing any changes in our HP or Nokia relationships. First, Europe: we’re not seeing any real slowdown as a result of the European uncertainty, and I think it’s a little early but I think there are two primary reasons for this. First, remember we are not unit-dependent. Regardless of how many units clients sell or don’t sell in Europe they still have to translate in order to sell and market locally. So if their demand drops by 5% or 10% they still have to spend with us.

What we saw in the last downturn is that when people do get nervous they start pulling back on some of the optional activities, like some e-learning activities and other things, but we really haven’t been doing much of that as we’ve refocused our strategy so it feels pretty stable. I’d like to remind you that only about 15% of our revenue comes from clients that are based in Europe, and as you look at who those clients are – Rolls Royce, Porsche, Volvo, Nokia, European Parliament – it’s clear that their businesses are not based on demand just inside of Europe. For example, China is now Porsche’s largest export market, outselling both Germany and the US. So we help our European clients sell into their export markets. So you can argue that we’re doing a defensive play in Europe right now.

Second is Nokia. Obviously Nokia is down as we’ve expected them to be this year, and as you can see we’re more than offsetting this decline with growth from other mobile and consumer tech clients like Samsung, which is based in our Korean office of course and is one of our fastest growers in the first half. And we’re very excited about further developing our relationship with Samsung. So mobile continues to be a strong, growing end market for us.

Finally, you’ve asked about HP. Believe it or not, that account is actually growing for us this year. The center of that relationship, to remind you, is in the testing area where we have multiyear contracts. And sometimes we like it when clients are under a bit more stress or they’re going through a corporate reorganization because they’re more willing to examine internal processes and outsource a bit more of those activities that have been sort of kept in-house.

So in sum, we have a lot of positive revenue momentum. The changes and investments we have made in our Sales and Marketing Teams are paying off and though we’re pleased with the solid demand environment, our existing base of business continues. So before I turn it over to Don let me just touch on some of our SaaS initiatives, and as you saw, we wrote down some of the assets related to the IBM license of several years ago.

To remind you, when we developed GeoFluent, our part of the development of this partnership was some middleware here that was independent of individual language engines. And we focused on customization and normalization that’s independent from the face machine translation engine.

As we brought GeoFluent to market, we found that some of the other NT engines are better optimized for the casual nature of user-generated content or consumer-oriented activities – things you find in chat and forums for example – and this is where we’re finding that early demand for GeoFluent is from new customers and new applications.

[We’ll continue to unlock] from the IBM development, but their engine I think has a number of uses that aren’t necessarily optimized for the consumer orientation – it’s more for the enterprise orientation. And so as we look at our pipeline today it’s clear that it’s weighted toward applications that use other NT engines, and this triggered the write

down.

GeoFluent continues to gain traction, particularly from newer organizations that don’t have that reengineering process that are in the early stages of going global. So we have really a number of active customers for GeoFluent today and the pipeline is growing. I was down in the cafeteria the other day and I met with one of the GeoFluent team after they went live with a customer.

They gave me an anecdote that they had about, on the first day one of their customers had 60 multilingual chats in the first 48 hours and all but one was indistinguishable from a native speaker. So that feels as if we’re really getting the right option, the right traction. And clearly we don’t have large amounts of data to demonstrate this but all the field anecdotes now are coming in and they’re feeling pretty positive.

We’ve also learned that GeoFluent is really a partnership sales so we spent the last six or nine months, and as you know we’ve developed partnerships with LivePerson, Moxy, Intelligent who are market leaders in chat and community software who recognize the value of taking their solutions global. So together we’re pursuing large opportunities with large enterprises that are looking to cut global support costs, and we’re going directly to a lot of the newer, smaller organizations.

So we’re very excited about the traction that we have here but it’s taken us about six months to get the right combination of language engines, channel partners, and appropriate end markets for that combination. So with our new offerings, new verticals and new cost platform we’re driving positive results across all of our end markets. So with that, before I wrap it up, I’ll turn it over to Don to provide some details on our financials. Don?

Don Muir

Thanks Rory, and hello everyone. Today I’ll provide a financial overview of our very positive Q2 and then I’ll give you an outlook for the second half. As you can see from the numbers, Q2 marked another strong quarter of revenue and profit. We delivered stronger-than-expected revenue of $119 million despite the currency headwinds. Clearly our sales and marketing investments are starting to show results.

Gross margins trended up nicely. We generated almost $7 million in operating profit in the quarter excluding restructuring and impairment expenses. Operating cash flow was $6.6 million during the quarter and we continued to have a solid balance sheet – all in all a good quarter and a very strong first half. Now let me delve into some details.

We grew revenue about $6 million or 5% year-on-year. In constant currency, revenue increased about $10 million or 9% year-over-year. The strong top line growth was driven by three things: one, solid growth from most of our top ten clients, in particular Google, Samsung, and HP; two, organic growth from our life sciences and manufacturing verticals as we successfully diversified our client base; and three, a solid ramp of many of our newer accounts. So we continue to see broad-based growth both within our large accounts and outside of our top ten.

Looking at it from a segment standpoint, our GLC Language business grew about 4% year-over-year and almost 9% in constant currency. PRI, the acquisition we closed on June 1, added about $800,000 of revenue in the quarter and is reflected in our GLC segment. So our GLC Translation business had a strong organic growth and a small contribution from PRI. Our GDT Testing business grew 11% year-over-year and interpretations were essentially flat. Clearly Q2 was a solid quarter for us following on the heels of a strong Q1 as well, so I’m quite pleased with the performance of our sales teams.

Total company gross margins were 32.4%, an increase of 200 basis points year-over-year driven by volume and more favorable currencies. Gross margins in our GLC Language business improved notably from last year to 34.2%. Margins in our GDT Testing business were 30.8% and Interpretations was 16.5%. Our Q2 operating expenses were up only slightly year-over-year excluding restructuring and impairment items, so we continue to manage expenses while driving revenue growth. As Rory said, we now have a more efficient cost platform to drive operating profit.

Restructuring and other items totaled about $6.7 million this quarter. I’ll break that down for you: restructuring was $2.3 million, asset impairment expenses were $4.1 million, and we had about $300,000 of PRI acquisition-related costs. Regarding restructuring in Q2, we closed the production office in one of our European locales as planned. This marks the final phase of the previously-announced multiyear restructuring plan. So for your models going forward I’d expect minimal restructuring expenses.

As leases come up, we always take the opportunity to evaluate our geographic footprint but I expect that the major restructuring is behind us at this point. Regarding the asset impairment expense in the quarter, this relates to two items: one, the [IPPS] technology relicense by IBM – as Rory explained, as you look at our sales pipeline for GeoFluent it is weighted towards languages and applications that use other machine translation engines; and two, the other impairment expense related to the planned sale of European real estate.

As you look below the operating profit line you’ll see that other expenses were about $700,000 this quarter, mostly related to the currency impact of quarterly balance sheet revaluations. And as we’ve said in the past couple calls, for your models going forward we expect our other expense line to be plus or minus about $500,000 per quarter.

We had a tax benefit this quarter of about $3.2 million. This is driven by our Q2 acquisition of PRI which generated a $3.2 million deferred tax benefit resulting from the purchase price GAAP accounting associated with recording of intangible assets. Additionally, we had about $750,000 of favorable tax adjustments during the quarter. This offset our routine quarterly tax provision of roughly the same amount. So for the accountants and CFAs on the call I’ll be happy to take you through all that math after the call. In short, excluding acquisition-related benefits and some favorable tax adjustments in the quarter, a normal quarterly Q2 tax provision would have been about $750,000 where we expect it to remain going forward.

Moving to GAAP earnings, Q2 earnings were $2.5 million or $0.04 per share, and as you can see from our release non-GAAP earnings were a record $11.1 million or $0.18 per share. If you back out the PRI tax benefit non-GAAP earnings were still a record at $8 million or $0.13 per share – very strong earnings all around.

Now let’s talk about the balance sheet. Our ending cash balance for the quarter was $19.6 million, essentially flat from Q1. We generated cash flow from operations of $6.6 million this quarter and it looks like we’re on track to generate between $10 million and $12 million in operating cash flow for the year. So I’m pleased with the cash flow trends despite the receivables-driven working capital increases associated with revenue [growth].

Accounts receivables increased $8 million due primarily to strong revenue growth in the quarter and $2 million from the acquisition of PRI. Unbilled receivables, which saw an uptick in Q1 due to timing in the quarter came down $3.5 million in Q2 as expected and this includes an increase of $1.1 million for PRI. So on a like basis, unbilled receivables came down $4.5 million from last quarter despite revenue growth. We had DSOs of 54 days, an increase of about three days from Q1, with about half of that increase being acquisition-related. So we continued to maintain low DSOs for a company of our scale, and I continue to be very pleased with the overall quality of our revenue.

With strong cash flows, we paid down $4 million of debt this quarter, so of the $10 million of debt we took on with the PRI acquisition on June 1, we’ve paid down 40% of it within the first 30 days of closing. So you can see we continue to use our cash to grow the business and manage our debt appropriately. 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, driving profits, and maintaining a strong balance sheet. Looking forward for Q3 we’re estimating revenue of $112 million to $115 million. Historically, Q3 is down a bit from Q2 due to European seasonality. Looking forward, we expect a strong Q4 and finish to the year as client programs ramp back up in September and through the year end. For the full year we are reiterating our growth estimate of 5% to 10% with the expectation we’ll come in at or above the midpoint of that range despite the currency headwind on revenue. So I’m feeling positive about our top line growth and the early indications for a strong 2013.

So in summary, I’m very pleased with Q2. We are seeing early signs that our new offerings, new vertical strategy and new product platforms are driving results. Revenue growth is trending nicely. We continue to see strong profit momentum and our balance sheet remains in solid shape. So with that I’ll give it back to Rory.

Rory Cowan

Great. Thanks, Don. So as you can see Q2 was a positive quarter and as you know, it’s traditionally our strongest quarter but I think this year it was even stronger than we expected given our execution and given our new strategies, our new offerings, and our new cost platform. So as I said last quarter, we’ve got some positive signs in the business. We’re certainly not swinging from the chandeliers but I think I am pulling the chair out a little bit and maybe standing on the chair now. So with that comment I think we’ll open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions.) Our first question or comment comes from Jason Kupferberg from Jefferies. Your line is open.

Amit Singh – Jefferies

Hi, this is Amit Sing for Jason Kupferberg. Good revenue growth this quarter. Just a quick question on your restructuring assets. I’m just trying to get a sense of how it should benefit, I mean all the expenses or the charges you have taken till now, how it would benefit your top line and margins. As we look over the next two, three years should we still expect margins to grow 50% to 100% year-over-year or has your assumption changed?

Rory Cowan

Listen, I’ll turn this over to Don in just a second, but our restructuring here remember is really focused more on our cost platform rather than our top line growth. So in this particular restructuring, we announced the program a couple years ago - $18 million to $20 million over a couple of years. It takes some time to get things out of Europe and do it properly. I could have spent more and gotten it done faster but I like to preserve the cash here.

So part of our restructuring was closing an office, so that should reduce some of our activities of cost above the gross margin line and below the gross margin line. Other parts of course were the write down in technology, and then there’s a real estate, a building we’ve been trying to sell since we acquired [Bound] five years ago. So that should help us out as well. But Don, what do you think – sort of 50 basis points a year might be what they should model?

Don Muir

Yeah, I think that’d be good for 2013. And if you look at the restructuring we took in Q2 related to the office closure, a little over $2 million – that’s probably an 18-month payback on that so you can build that into your cost model.

Amit Singh – Jefferies

Thanks. And I believe you already mentioned, or maybe Mr. Muir did – the top line growth year-over-year you’re still expecting 5% to 10% or maybe slightly above that?

Don Muir

We said that we expect to be probably a little better than the midpoint of that.

Amit Singh – Jefferies

Okay, perfect.

Rory Cowan

And remember, that’s in spite of the currency in the Euro because we do have Euro-denominated revenues. So like many other companies, they’re taking down [half too] based on the weakness of the Euro. Our Euro-denominated revenues are coming down but since we’ve added PRI and we’re executing better we’re feeling as if we can just hold where we were.

Amit Singh – Jefferies

Okay, great. And then there was definitely a lot of tax benefit this quarter. Do you expect anything related to the acquisition-related tax benefit to come in the next two quarters? And just to add onto that a little separate question: how much of the FX benefit did you get in margins this quarter?

Don Muir

Alright, the first part of that relating to the acquisition-related tax benefit – that’s affecting Q2 and we do not expect any further impact going forward; from the coming standpoint you won’t. As I said in the call, the tax rate provision of about $750,000 a quarter should prevail for the next couple of quarters; and long term we’ve always said that we’d kind of settle out at around a 25% effective tax rate once we’ve reached reasonable levels of profitability which we’re starting to get towards. So that’s essentially it on the tax front.

I think from a currency standpoint we did see certainly year-over-year as the Euro depreciated about 10% and we [divested] from kind of a 15% to 20% assistance from currencies like the Rupee and the [Saudi]. As you know, strategically we’ve proactively moved a lot of our production in support into low cost locations in some emerging geographies that have weak currencies, so that helps us in offsetting a little bit of strength from the Yen. So we did see a couple hundred basis point improvement in the gross margins as a result of currency year-over-year. Sequentially though, we really didn’t see much of a currency impact versus Q1.

Rory Cowan

Yeah, remember: the way to think about it is we have a strong dollar bias unlike many other companies that have a strong Euro bias or a strong foreign currency bias. And so that’s just directionally where we are.

Amit Singh – Jefferies

Alright, perfect. Thank you very much.

Operator

Thank you. Our next question or commend is from Richard Baldry from Wunderlich Securities. Your line is open.

Richard Baldry – Wunderlich Securities

Thanks. If we go back to the number of years, my recollection was of sort of the consumer-facing efforts of a lot of your clients actually ticked up demand or work with you in Q3 as they got ready for Q4 and sort of a pickup in the consumer side. So can you talk a little bit about how you think that’s changed now if you’re saying Q2 now is going to typically be a bit stronger, because you did follow and highlight strength in consumer tech in the quarter which might argue for a return to that type of a pattern this year?

Rory Cowan

Yeah, Rich, that’s a good point. Just to remind everybody, we’ve generally thought about our year in sort of two halves: Q2 and Q3 are a package and Q4 and Q1 are a package. So I think we’re seeing that strengthening in Q3 given that we’re actually holding our guidance, and we might see Q4 strengthen a little bit as well because of our more marketing oriented and global programmatic relationships now rather than product activity. So that’s a large part of our shift.

In addition it’s too soon to look at the impact of cloud-based products from all of our customers yet because remember, when things go to the cloud you’re doing constant updates. So I think we’ll see over the next couple of years the seasonality begin to diminish and stronger recurring revenue relationships begin to increase. So think of Q2 and Q3 as a package and Q4 and Q1 as a package right now.

Lastly, in our guidance for Q3 we traditionally, as Don said, have been down is it 4%, is it 5% quarter-on-quarter just given that the European groups, it’s just hard to get stuff closed and delivered in Europe. And this year it’s about the same thing, and then you add back PRI and we’re in pretty good shape. We’re doing well, Rich, but I just don’t want to get too excited about Q3 and Q4 just given the uncertainty around the world. There’s no reason to get overly jubilant about the second half of the year.

Richard Baldry – Wunderlich Securities

And aside from the manufacturing and life sciences verticals you called out a sort of momentum plays in focus areas. As we move out to next year are there other verticals that you’re sort of looking at as follow-ons or add-ons to those that can continue to sort of expand your end markets?

Rory Cowan

Yeah, I think if we’re doing it right I think that, when you say the industrial end markets – we have to focus on end markets and geographies and offerings. So you’ve got to get the synergy. You’ve got to line up three activities here to win an end market. As we’re seeing with life sciences after one year, life sciences itself has three individual end markets: clinical trials versus med devices versus global pharma packaging. So if we’re doing our job right I think that just by the middle of 2013 or early 2014 I may break those two segments up into sub-segments as well.

And I think we’re seeing a lot of the export growth is really coming from these industrials, and our center of revenue generally is Germany, the Midlands in the UK, and the Midwest in the US.

Richard Baldry – Wunderlich Securities

Okay, congratulations on a great quarter.

Operator

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

George Sutton – Craig Hallum

Thank you. Congratulations on the results and thanks for answering a lot of the key questions in your prepared comments. Relative to this discussion you had regarding both the manufacturing vertical and Microsoft becoming increasingly digital, can you explain what you mean by that in terms of how does that impact your business differently?

Rory Cowan

Right. So think about someone like a Caterpillar. Post WWII Caterpillar was instantly a global company as the troops left all this equipment all around the world. So for the next 30, 40, 50 years they were maintaining and setting up dealer organizations and they had to be in local language. The underlying technologies didn’t change very quickly because to document we’ll say a hydraulic piston, year over year, product over product it was really quite simple. So underlying technologies didn’t change; a sharp contrast to the digital industries where a new product, new offerings and new capabilities would be changing annually. So you have lots of new words and lots of new releases.

So now I’ll look at what’s going on we’ll say at a combine or look at what’s going on in an engine now. There are so many digital technologies, and digital technologies require software localization, meaning reengineering so it works in local language. It also needs constant updating in local language because the underlying technology changes, so a lot of words change. So as you migrate from electromechanical to digital, more words, more changes.

And also with our unique capability with GMO and with some of our other activities here, we’re able to maintain global releases, maintain global updates on a much shorter cycle time because we focus on the world simultaneously rather than country-by-country, language-by-language as most of the mature industries have done. So it’s a complex migration, George, but we’re beginning to see that, and our Rolls Royce relationship points that out as well.

If you remember, Rolls Royce has a Marine Turbine Division which in a recent Economist there’s a very interesting article where they talk about all the technologies going on in shipbuilding right now that Rolls Royce is building and integrating. And that is all, I don’t want to say it’s 100% digitally oriented but there’s an awful lot of really forward-thinking technology in the marine industry right now.

George Sutton – Craig Hallum

Okay, that’s helpful. Now Don, relative to your revenue guidance are you able to give us a perspective on how much the Euro impacted that guidance relative to what we would have thought a quarter ago?

Don Muir

Well, I can tell you that in Q2 as we said in the call, year-over-year we took about a $4 million revenue haircut although sequentially it wasn’t as exaggerated – about $1 million on a sequential basis. So I think if you go back to when you did your models you were probably using a little bit stronger Euro rate than what you have in their today. What we said last quarter is that expect that the incremental PRI is probably going to offset the currency impact you’re going to see going forward, so that’s probably a good rule of thumb. Forgetting about $800,000 in the month of June PRI revenue, so call that it’s $2.0 million to $2.5 million a quarter and that sort of offsets that FX impact I think for Q3 from a guidance standpoint.

George Sutton – Craig Hallum

And lastly if I could, just to make sure I’m thinking of the numbers correctly: your GAAP result was $0.04. It included the impact of the European restructuring which by my math would be another $0.07 or so – is that a correct way to look at that?

Don Muir

Well, if you look at all the component parts that we talked about, the $7 million of impairment and restructuring – so you’ve got to look at the write off on the technology, the impairment that we took on the buildings as well as a couple other dollars of restructuring; $6.7 million. If you look at that on a per share basis that’s a better part of $0.11. And then if you net out the PRI tax adjustment, that’s about $0.05. So you’ve probably got another $0.05 or $0.06 that you can add to the GAAP earnings to get you up close to $0.10.

Rory Cowan

Right. So restructuring was a headwind of $0.11. The PRI carrier tax benefit was a savings of I don’t know, $0.05 or $0.06 and so you add $0.05 or $0.06 on top of $0.04 that you have and that’s how you get $0.10 or $0.11.

George Sutton – Craig Hallum

So bottom line, no pun intended, a pretty darn good quarter.

Don Muir

A very strong quarter.

George Sutton – Craig Hallum

Alright, thanks guys.

Operator

Thank you. Our next question or comment comes from Ben Rose with Battle Road Research. Your line is open.

Ben Rose – Battle Road Research

Good morning. I wanted to ask where are we about the Microsoft translation cloud services program and your perspective on that, and how Lionbridge fits in.

Rory Cowan

Great. Thanks. So we think about Microsoft, that whole company is in maybe really the second inning of moving all products to the cloud. They’ve maintained a machine translation initiative, and just to dial back it’s one of the reasons we worked with IBM on a license agreement rather than acquiring machine translation capability is we knew that NT is an area of all sorts of hot research from Asia, China, Microsoft, Google, IBM, every government organization around the world has an NT initiative as well with various sets of languages. So I wanted to keep a more flexible model that we could point and direct our capabilities to any underlying engine. So that’s premise one.

Premise two, Microsoft has developed this cloud-based activity which they’ve had for five, six, seven years or something – who knows how long it’s been going on. Remember, our ability is to take this core database, add some customization abilities on top of it and configure it for certain applications. So they have a generic database, we add customization on top of it, configure it and embed it in other offerings. So that’s our premise. So Microsoft was good with some languages, IBM was good with some languages and who knows if Hitachi or someone else in China is going to be good with other languages – we’ll figure that out next year.

So Microsoft and we as you saw are working very closely together to bring that NT database to market and we’re the one that are customizing it and focusing it on the business community rather than the consumer community.

Ben Rose – Battle Road Research

Okay. You answered my third question then with respect to the translation engines but I wanted to ask you a couple questions regarding manufacturing, and that is in your prepared remarks you noted a 20% year-over-year increase in the healthcare vertical but I was curious to know if you could quantify the like increase in manufacturing, A), and then B) is PRI so far or have they brought you into other manufacturing-oriented engagements or vice versa?

Rory Cowan

Yeah, I think year-on-year in the manufacturing group, remember, I just carved this out. This is the first year and as with anything I have to balance the needs of a corporation to be neat and tidy by segment with deep customer and sales and personal relationships. So is it up a few million bucks year-on-year? Probably directionally, yes. I think that when we get to 2013 I’ll have more solid year-on-year compares because I want to be thoughtful and maintain relationships rather than force everything to have a neat and tidy strategy or a neat and tidy segment orientation.

So secondly, you asked about PRI – yes, I think it’s only been really two months now that we’ve been together. We’ve had a lot of, as you can imagine I have to be careful not to smother that small corporation with all the Lionbridge love, meaning that we want to make certain that we don’t add costs and complexity to their world in which they’re executing very, very well. We have had a worldwide sales integration meeting, a management integration meeting last week in the UK. We share many joint global customers with them and we’re starting the process now of bringing some of our services to their customers.

And I’ve learned in doing this, and I’ve actually been on the other side of this when I sold a small company many years ago to a larger company, that you don’t want to move too quickly or you can lose the momentum and lose the value of what you’ve acquired here. So we’ll see the joint sales activities really begin end of Q3 and into Q4 is my bet.

Ben Rose – Battle Road Research

Okay, thanks very much.

Operator

Thank you. Our next question or comment comes from Vince Colicchio from Noble Financial. Your line is open.

Vince Colicchio – Noble Financial

Yes, good morning, guys, nice quarter. Rory, as the economy started to slow in July did you see any notable changes in client behavior, maybe sales cycles extended or there were some delays on some deals – any signs whatsoever?

Rory Cowan

Yeah, you know, we do a sort of weekly pipeline and forecasting review here and I have a bunch of our sales leaders on that call. And we ask those sort of qualitative questions. It’s hard, Vince, for us because in August the whole world seems to slow down; and by the way, even the US slows down for decision making in August. So it’s hard for us to segregate any worldwide softness from our normal decision making activity. We haven’t seen anything yet.

As I said, in other downturns we’re more defensive than others because people have to spend with us to stay in those countries. The behavior we’ve seen before is people cut back a little bit of what I’ll call the optional releases like e-learning activities or like some specific marketing activities. Since we didn’t pick up much of that when we upturned last time I’m not expecting much of that in the downturn but it’s really too early to tell. So that’s a long way of saying I apologize – we haven’t seen anything specific but we’re certainly cautious and very sensitive to it.

Vince Colicchio – Noble Financial

Okay. On the SaaS side, your comments have looked at positive momentum. Any change in your expectation in terms of revenue contribution there for the year?

Rory Cowan

Yeah, I think a couple things with SaaS now. Certainly we’re broadening this and remember, we have two of our own products that we’re developing which is TW, which also has grown its user base – we haven’t talked much about it but that’s grown its user base – and of course the GeoFluent offering. In addition, we’re now beginning to resell some others’ technologies that integrate with those two.

So are we feeling now that we’re going to exit 2012 with that $4 million to $5 million run rate for everything – probably. Am I behind on GeoFluent because I really didn’t think again that it had the right lineup of engines with the right size customers and the right applications? I think I’ve got that figured out now so I think that we’re going to see that grow through 2013.

And we do have some significant customers here; for example, Crate & Barrel is using this in real time for its support for its deployment in Canada. We have the Guild of Sommelier, the wine people are using this now so all the sommeliers can have a little online party to celebrate various wines and talk a little bit about various wines, so that’s working across languages.

As I mentioned we’ve got a couple of online gambling companies that are using this now outside of the US to support their customers globally, so we’re getting traction on some of the smaller, more global companies because these large enterprises just have so much restructuring to do to take advantage of the significant cost savings of these technologies. So it’s going to be a little bit slower sell for the bigger guys.

Vince Colicchio – Noble Financial

Okay. And in terms of on your GMO side, any competition there or is it still just you trying to convince the customer that you’re the way to go?

Rory Cowan

Yeah, I think in terms of competition what we’re seeing is that large customers are really becoming more sophisticated in this process. Again, moving from a country-by-country release to a global, parallel campaign they need language capabilities and they traditionally have done this internally or they’ve outsourced it to their ad agencies. Ad agencies get it done very expensively and agencies themselves are organized country-by-country-by-country with their sort of roll off structure, and internally people don’t have our great scalability. So those are the competitors we’re seeing – in-house operations and ad agencies as we move more towards marketing groups. So that seems to be whom we’re bidding against.

Vince Colicchio – Noble Financial

So to be sure you’ve been competing with those guys all along or you’re seeing an increase in their use of ad agencies?

Rory Cowan

No, this is a new offering for us entirely. We didn’t offer GMO until about middle of last year, and we brought in some new management and reorganized our line and delivery and sales around a segment as we talked about, around a vertical. And so these are new. As we’re going into a new market and a new application we have new competitors, and I think that what’s pretty clear is our translation areas and our global areas makes us far, far more efficient than the existing suppliers in that market.

Vince Colicchio – Noble Financial

Right. So basically you’re the good competition.

Rory Cowan

We’re the good competition, that’s right.

Vince Colicchio – Noble Financial

Alright, that’s all I have. Thanks.

Operator

Thank you. (Operator instructions.) Our next question or comment comes from Kevin Liu of B Riley. Your line is now open.

Kevin Liu – B Riley

Hi, good morning. Just a question on the GMO side. You talked about a growth opportunity this year and then potentially into 2013. I’m just curious if you can shed some more light on how these relationships are structured and what sort of visibility you have, are they multiyear-type agreements?

Rory Cowan

Right, so the underlying nature of that – because that’s something that frankly we forgot to emphasize that. Our customers, we have about twenty active customers in the GMO offering right now, so that’s the first thing. Secondly, given that we are managing global campaigns for them, unlike our core product localization business these generally are multiyear contracts with stronger recurring revenue relationships. So to remind you, we knit together language activities, global marketing campaigns across each of their subsidiaries. So in some cases, people are outsourcing to us the entire global marketing campaign coordination with their own employees and with their agencies. So we’re sitting between their country managers and their country marketing teams and their global branding initiatives, so that’s really what we do.

So it’s a much stickier relationship, and in addition as part of that we have a technology licensing fee as I mentioned because we’re putting people on some platforms that allow you to manage the world in a simultaneous manner rather than an individual country-based web content management system by web content management system. So in summary, longer standing relationships, deeper integration with marketing leads to a more stable revenue relationship.

Kevin Liu – B Riley

Great. And then regarding GeoFluent, you know with the kind of shift in the market orientation there I’m just wondering if you can update us on how you view the potential market opportunity and what sort of changes should we anticipate from a pricing standpoint? I think previously you gave us probably on a per language basis, per language pair basis and it seemed it could be pretty sizable within enterprise but I’m just curious as to how deal size has changed?

Rory Cowan

Yeah, I think what we’ve said is we’ve done traditionally what you would expect – we took this new technology to our existing large clients. All of our existing large clients said “This is fabulous, I’ve got to get some of that,” then they went to reengineer their own internal operations and they realized that to get to take German support out of Germany, French support out of France, Japanese support out of Japan was a multi-quarter and in some cases a multiyear reengineering issue. I (inaudible) about that but we’re maintaining those relationships.

We took this to the newer, web-oriented growth organizations; they don’t have an existing infrastructure to tear down so they’re working on this immediately. Now clearly those are smaller organizations with fewer language needs but their implementations are faster. So we’re not suggesting any change in our pricing model; it’s just a different go-to-market model because we’re partnering now as well with real time chat and we’re focused on forum activity as well.

Those are the two areas as you look at technical support now, there are fewer and fewer internal tech support sites as large companies and others begin to deflect the technical support and knowledge to these public forums – that’s how large companies are working. Small companies want to use live chat to deepen their relationship with all their new clients, so we’re learning an awful lot about this and as we get close to it and we get deeper into these offerings we’re actually becoming more enthusiastic about the long-term potential.

Kevin Liu – B Riley

Got it. And then my last question was just going back to when you set your Q2 guidance, obviously you guys have had two quarters now where you’ve come in over the top end of it. What’s kind of driving that strength or the variance versus what you might have expected early on? Are you guys seeing your existing customers just spend more than you thought originally? Was it more a function of conservatism on your end? I’m just curious as to what’s going on there.

Rory Cowan

Yeah, that’s a good question because as the quarter evolved things got stronger. I think existing customers, it was a little bit of everything – there’s no one thing which is what feels good, is existing customers are spending a little bit more; we’re finding new customers with our new strategy and some of our new offerings are getting a lot more interest. And so GMO is a new offering: better execution on our part and existing customers spending a little bit more.

Kevin Liu – B Riley

Okay, thanks a lot.

Operator

Thank you. I’m currently showing no further questions or comments at this time.

Rory Cowan

Great, well thanks everybody. And as always, if you have any questions we’re here to answer them as you build your models for the coming quarters. Thanks.

Operator

That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.

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