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Lionbridge Technologies, Inc. (NASDAQ:LIOX)

Q2 2008 Earnings Call

August 5, 2008 9:00 am ET

Executives

Sara Buda - Investor Relations

Rory Cowan - Chairman of the Board, President, Chief Executive Officer

Donald Muir - Chief Financial Officer

Analysts

Brian Kinstlinger - Sidoti & Company

Randy Hugen - Piper Jaffray

Joseph Vafi - Jefferies & Co.

Mat McCormack - FBR

Richard Baldry - Canaccord Adams

Operator

Welcome to the Lionbridge Investor Call to discuss financial results for the second quarter of 2008. (Operator Instructions) Now I will turn the meeting over to Sara Buda.

Sara Buda

During this call we may make certain statements that may be considered forward-looking statements under federal securities laws and which involves risks and uncertainties. Our actual future results may differ significantly from the matters discussed in any forward-looking statements. We have disclosed in greater detail in our Form-10K filed with the Securities and Exchange Commission 2008 the factors that may cause such differences and now I will turn the call over to Lionbridge Chairman and CEO Rory Cowan.

Rory Cowan

Today, of course we will walk to our second quarter results and discuss the achievements that we believe are positioning us for a continued strengthening in the second half of 2008 then I will turn it over to John who can walk you through the details in some of the financial milestones for the quarter including our balance sheet management which is really coming along very nicely.

So, first let me briefly summarize the quarter. Revenue was strong this quarter. We drove about 10% growth compared to last year and more importantly, about 7% compared to last quarter and I think that is important a sequential quarterly growth because currencies now seems to be trading within $0.04 or $0.05 range and so I think that is really a nice metric as the world begins to stabilize in this environment.

Our organic revenue growth is really starting to return and our customer quality ratings have never been higher and in fact, most importantly, the pipeline of new business, large projects has strengthened and I am delighted with our demand environment as we head into the second half of the year. So, that is the revenue side. Margins, they also improved compared to last quarter and we returned to profitability despite the continued strong position of the Euro.

It took us a few quarters to reconfigure the business and to manage our infrastructure for today's currency environment but you can see from our sequential revenue growth, margin improvement and profitability, all of that activity from Q4 and Q1 is really beginning to show through. Perhaps more importantly is we delivered strong cash flow from operations of about $11 million for the quarter. Once again, strong cash flow capability of the business is evident and that is important as we used that cash to buyback about $2 million of stock during the quarter and we paid down about $3 million of debt just to be prudent in today's uncertain credit environment.

Overall the second quarter was a success. We are growing our customers, margins are improving. We are managing currency and we returned to profitability and we continued to generate strong cash flows. Now, let me provide some detail on our two focus areas for 2008, revenue growth and cost management. Of course raising the bridge and lowering the water and the positive trends are the point to the strong second half and of course 2009.

Customer demand, for this quarter we saw increase demand across our business. We grew many of our existing account including our top two customers, Microsoft and Google and both of those, of course, we have a broad and deep and far ranging relationships. Our top ten customers grew more than 15% year on year and we won some new business including large program with a leading internet company, a global pharmaceutical organization and a security software company. It seems that one of the conclusions I am drawing here is that as the US economy softens, it seems that export markets are becoming increasingly important to our customers and there seems to be an increased level of commitment to achieve sales growth in overseas markets by all of our customers.

So, these wins combined with the continued growth of our top accounts really reflect our three positive trends in our business. First, we are leveraging our global infrastructure to broaden client relationships and provide additional services and that additional services piece is very important because we know how to manage a worldwide contract workforce and this skill set has many end market applications. For example, we are seeing strong demand for search relevancy testing service which is part of our GDT segment. What we do there is we make certain that search engines, that searches are relevant in over a 100 locales or maybe a 110 I think now, of different languages and different geographies for a variety of search companies.

This offering, of course, built on the skills we have developed in our language business. For search relevance, we used independent raters to test the intent and usability of a given search term and its certain geography. This expertise in global, mobile workforce management is allowing us to both expand our large existing account and win new business. With the record growth of internet users in global markets, you could see the broad applicability to this service going forward. So, the growth in our GDT segment demonstrates the broad applications for our global contract workforce which is really an extension of the skills from our GLT segment.

So, it really does not matter if our partners are translating, offering content or testing search engines, our global program management skills are driving new business across a variety of end markets. So, the second positive trend is our customer satisfaction. Recent survey shows that we are achieving the highest scores for customer quality. Both our own internal surveys and many of our customers have shared with us their ratings of our services and we score at the top in both of those surveys.

While there is always room for improvement, customers are giving us more record high marks for quality, reliability and more importantly, innovation. This customer satisfaction allows us to be successful in our Euro recovery pricing initiative which I will discuss shortly. These recent customers' surveys validate that we have the best delivery teams in the industry. Our web-based technology is far superior to our competition and we have the right technology services model to meet these clients evolving needs and that is why customers are choosing Lionbridge, that is why they are staying with Lionbridge and that is why they are growing with Lionbridge.

So, the third trend affecting our business is the role of our technology as a differentiator and a competitive advantage. Thousands of translators around the world are accessing our hosted translation platform. In fact, each month Logoport, this core technology, now processes more than 60 million words for hundreds of client programs. Scale, reliability and security of this platform is really proven because of its unique web architecture, Logoport provides key benefits for us as well as for our client and as a result, most of our top clients are now using Logoport and some of our recent wins are a direct result of this superior technology.

As far as we know, Lionbridge is the only company that combines this advantage to web architect the language technology of global contract workforce management skills and sophisticated work load technology. This combination is allowing us to pursue new business models including opening our platform to a broader communities such as freelance translators, agencies or even students. We can offer these communities immediate access to work at home income. In return, we gain access to a greater number of resources to enhance our efficiency for our corporate customers.

So, the platform is opening new opportunities for us to grow revenue upstream and enhance our cost structure as well as broaden our offerings. This self reinforcing model that is really beginning to get quite a lot of traction and you might hear more from us in this area during the coming months. As we look at our pipeline of business for late 2008, 2009 is clear to our position for growth. We have looked at some of the number of very large programs that are beginning to start second half of the year which really portend a very strong 2009. We are building a range of services that leverage this global footprint build on our skills managing this global mobile workforce.

So, we are also pursuing a number of new revenue opportunities based on these skills. So, now let us talk about the reconfiguration of our cost structure. As we discussed in our last call, our currency has had a significant impact on our business. We know about 70% of our business had been affected by the Euro in the past; I do not know three months or so. So, when that shift happens, it took us a couple of quarters to get reconfigured and I think now after two or three quarters of that transition, you are beginning to see the strength of those initiatives.

Just in the past twelve months alone, if you take the average, the Euros depreciated about 16% versus the US dollar which of course is negatively affecting our cost to sales or operating expenses. In fact, we estimate that this cost us about a nickel or $0.05 a share at this quarter despite the revenue benefit. To offset this currency headwind, we have got really two areas of cost management that we are picking up the pace on. First, is our Euro recovery pricing initiatives. Over the past few weeks, we have successfully amended several major customer agreements to offset currency cost that we have to work on their behalf.

This is just one of the benefits of working with our high quality customer ratings. Our customers are willing to work with us on this Euro recovery program because they value our services because we have proven our capability of quality, delivery and innovation. We are still in the early stages of this process but so far I am relying to progress on this pricing initiative. The second issue of course is fix cost management. Because of our high customer satisfaction, we have now the confidence to accelerate cost management efforts.

We continue to manage headcount and lease expense specifically in our European locales. We saw a bit of restructuring expense this quarter maybe about $200,000 and this may grow in the coming months as we continue to benefit from our in the cloud technology and offshore delivery model. With stable organization structure, solid client relationships and very strong proven technology, we can now appropriately adapt to our business while preserving our hard-fought positions with our customers.

So in summary, Q2 was a success. We are reconfiguring our operations to make money in today's precarious environment. We are leveraging our workforce management skills to broaden the services we provide to customers. We are increasing customer quality. Our Euro recovery program is taking hold and we are reducing our fixed cost. And also more importantly, our pipeline of business is strong and strengthening.

So, now I will turn it over to Donald to talk about the financial details of the quarter.

Donald Muir

Today, I will start with an overview of the quarter and then I will provide an update on several key areas of focus for 2008; taxes, cost management and our balance sheet. Q2 was a very solid quarter and exceeded quarterly revenue and earnings expectations. Revenue growth was strong both year on year and sequentially.

We drove a sequential improvement in quarterly gross margin percentage of 60 basis points. We increased operating income by $3.3 million sequentially from Q1. Other expense line declined by approximately $2 million sequentially from the last quarter due impart to a successful hedging programs. We returned the profitability for the quarter with an EPS of $0.02 per share despite currency headwinds. We had another strong quarter of cash flows with almost $11 million. So we were pleased with our progress in Q2 as we grew revenue, controlled our cost and managed our currency exposure.

Now, let us get into some details about the second quarter. Revenue was $125.5 million for the quarter and was down about 7% sequentially from Q1 2008 that was about 9.5% higher in Q2 a year ago. Year-on-year organic revenue growth excluding currency impact was approximately 3%. However, sequential quarter revenue growth in clients and currency was 6% versus Q1. So, we are delighted to see our revenue momentum return and as Rory mentioned, the revenue pipeline is solid and includes a number of large multiyear projects that should begin sometime in the second half of this year. One of the positive aspects of the Lionbridge business is that we enjoy very strong recurring client relationships.

In fact, once again, about 80% of our revenue came from clients that have doing business with us for eight consecutive quarters or longer. This is a testament to our quality and innovation that our customers value. Gross margin was 31.5% for the quarter. This is markedly a 60 basis point improvement of the Q1. Gross margins are still down compared to last year largely because of the weak dollar which declined 16% versus the Euro from a year ago. As Rory indicated, we estimate that currency negatively impacted our bottom line by about $0.05 this quarter despite the benefits to revenue.

Even with the currency headwinds, we generated GAAP net income of $908,000 or $0.02 per share and it is terrific to see the business return to profitability. During the second quarter, we increased our R&D spending by about $500,000 from last year. As we indicated, we are further developing our technology platform. This is delivering ongoing benefits to our cost structure, increasing our competitive advantage and opening up new revenue opportunities for the Company. Now, let me provide some more detail on my progress on tax, cost management and balance sheet improvements.

Our second quarter tax provision was about $600,000. This is sequentially flat with last quarter and represents an improvement of about $2 million from last year's tax provision despite earning higher pretax income. So, the new tax structure we have put in place at yearend is yielding the results that we have expected. As you may recall, during our fourth quarter 2007 earnings conference call, we had guided you to expect a full year 2008 tax provision of between $4 million and $5 million with some opportunity for reducing that number even further.

We are very pleased to report that we have just obtained a favorable ruling on a significant tax matter that has been under appeal since the first quarter from the Irish tax authorities. This should reduce our third quarter tax provision by approximately $2 million so we will likely have a tax benefit in Q3. This should position Lionbridge for a full year tax provision in a $1 million to $2 million range. In addition to reducing taxes, my other priorities as CFO include cost control, balance sheet management and currency risk exposure mitigation.

As many of you know, currency hurts us in the margin and operating expense lines. We do not currently hedge our income statement; however, we have been focused on taking a number of actions to offset our P&L currency exposure. As we said, we are able to adjust our contractual agreements with many large clients and not only offset the currency impact that we have been bearing as our Euro cost rise but to increase prices in the absolute terms. Thanks to the strength of our client relationships, our sales teams have been very successful with this Euro recovery pricing initiative. We are also managing our headcount and lease expenses specifically in our European locations.

So, we will continue to offset our currency exposure in our cost of sales and operating expenses by managing our cost structure appropriately. We are also making progress in our other expense line. As a reminder, this has been primarily the P&L impact of the reevaluation of foreign currency denominated assets and liabilities. While this is a non cash expense, it has cost us several million dollars in net income over the past several quarters. However, in Q2, we successfully mitigated this exposure. We are benefiting from a more stable quarter to quarter currency environment, in fact, as other expense line decrease by about $2 million sequentially from Q1. So, our cost management actions are beginning to take effect. Our Euro recovery pricing initiative is taking hold.

Moving to the balance sheet where we have made some significant progress, we are seeing ongoing improvements in working capital. During Q2, we generated $10.8 million in cash flow from operations. DSO improved to 59 days which is down 1 day from last quarter and down 6 days from the end of 2007. Our second quarter ending cash balance was $28.8 million, an increase of roughly $3 million from last quarter despite spending $3 million on debt repayment and $2 million on share repurchases. As we said in the last call, we felt the debt repayment was prudent given the global credit market instability.

We currently have a comfortable net debt position of $40 million. We have a good credit facility with an attractive interest rate and additional capacity in our bank line. We also used cash during the quarter to buyback about $2 million worth of stock. Just to remind you, we bought that over $12 million worth of stock in Q4 and Q1 as part of our initial share repurchase authorization. So, we bought back about $14 million of stock over the past three quarters and we have another $10 million ramp under our second share repurchase authorization going forward. You can expect us to be in the market from time to time as market conditions warrant.

So, in summary, revenue appears to be strong and growing across our business. Margins have improved in the last quarter and we are profitable. We continue to manage tax within our new structure and our cash flow remains strong.

Now Rory, back to you.

Rory Cowan

So, let us talk about the second half of the year and Q3 specifics. We are estimating Q2 revenue to be about a $118 million to $122 million reflecting a traditional Q2 to Q3 seasonality and that really is all about August. We got a lot of large projects and it is really a question of when the flywheel starts spinning again in September when people come back to work when we get these projects kicked off. So, second half of the year looks very, very solid for us.

For the full year, we are reiterating that we expect to achieve the high end of our revenue growth estimate of 6% to 10%. Our margins in the second half of the year should improve slightly from the first half as our technology drives improvement in the Euro recovery initiative begins to take effect. For operating expenses, as we said , we should be able to keep expenses growing at only about 5% despite the continued sort of year on year appreciation of the Euro versus the US dollar although second half of the year the compares get a little bit easier.

Clearly, our currency management initiatives are working in second half compares is up that is because it is really end of Q3 and Q4 is when the Euro began to run, the dollar began to decline and as I have said, we have been fairly stable in our plus or minus nickel sort of range for a couple of months now. As I indicated, we may have some additional tax activity that should benefit earnings in Q3, balance sheet improvements are starting to show through and cash flow continues to be strong and we do have another $10 million authorized in our stock buyback program so we will be in the market from time to time and so all of these point to a solid second half of the year and really setting the table for a very strong 2009.

So, let us open the call for question.

Question-and-Answer Session

Operator

(Operator's instruction) Your first question comes from Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

I wanted to ask first the statement that you guys made in your release saying second half of the year earnings would accelerate. Is that year over year or is that from the second quarter? I want to exclude that tax benefit in the third quarter so I was looking at pretax profit. Was that what you were trying to get up this September and December?

Rory Cowan

The first half, Brian. I guess, Brian the reason why we are focusing on that because last year was last year and about the new currency environment so we are trying to really look at sequential improvement here because the world, it is like the airlines have the jet fuel increase. I mean, comparing to last year is one thing but sequential quarter is what you are looking at there.

Brian Kinstlinger - Sidoti & Company

Right and so for the little bit last revenue in the September quarter, there will be some more cost savings like in some of the other income line and a little bit better maybe pricing that helps you achieve a similar pretax profit number, is that how to look at it?

Rory Cowan

I think that those items will certainly offset the decline in sequential revenue. We are leaving up to you to do that math but certainly we will have a little bit lower revenue sequentially in Q3 versus Q2. That will put some downward pressure on gross margins but as we mentioned in the call, we have some offsetting factors like price changes that will mitigate some of that.

Brian Kinstlinger - Sidoti & Company

Right and it is really when you can provide revenue by your three segments that will give us some kind of indication of they were moving you over year or quarter over quarter, however you want to look at it.

Rory Cowan

Yes, let us see the prior quarter, actually it is interesting on the quarter on quarter, it is almost across the board even a growth from Q1 in those 7.2, 7.3, 7.2 sequential quarter.

Brian Kinstlinger - Sidoti & Company

Okay and what about margins? It seems that your margins have moved up, which division, which segment is the one that seems to be moving up? Is that the price increases you are getting on GLC or is that something else driving that?

Rory Cowan

Let us see, we are trying to get margin trends here, gross margins…just give me a second to get around the screen here. Yes, I think it is about a push in GLC right now because it is really the price activity has not really kicked in just yet because remember, we have essentially yearlong contracts and when the currencies begin to run last year, it took us a while before we could renegotiate those with new currency environment which has been happening during Q2.

On the GDT business which really has two components and there is a large globalization activity in our GDT business and that had shown some very nice flip, I do not know, about 170 basis points or so.

Brian Kinstlinger - Sidoti & Company

And what is causing that lift there?

Rory Cowan

I think we are just getting much more efficient. We are getting much more revenue and this is again the deal we talked about. We are using the skills in managing our translators as global workforce; we are now using them to work in the search relevancy rating because the search engines, we are now making certain that search engines are effective, about 110 languages around the world. So, we just took the skills we had to manage the translators, we are focusing this on the global search environment which feels pretty good.

Brian Kinstlinger - Sidoti & Company

Great and you had mentioned that, oh I am sorry but the last question on pricing is so if the GLC was not starting to see it. When you might you think you see the evidence begin, might you see it in the numbers and at what point where you already approaching your GDT customers as well?

Rory Cowan

I think that GDT first does not have as much currency exposure in it because the physical infrastructure associated with that business is really quite small in Euro terms as mostly the contract workforce. So that is one issue that is a little bit easy and those are newer contracts that we configure appropriately. Offset we are issuing currency there, when you think we will see the prices come through in the GLC business. As Don said, you will see some of it in Q3 but clearly throughout all of Q4.

Brian Kinstlinger - Sidoti & Company

Okay that is helpful and you had mentioned some large programs starts in the second half of the year. Is that a new customer starts or is that, as you said, a percent of businesses with customers for eight quarters. Which bucket is that falling?

Rory Cowan

It is actually both and I think that what we are seeing is now that we have focused I mean you guys were not as pleased with me last year as we focus on the customer, the customer, the customer. Now, that the quality of the liability up and the Euro recovery program in place now, I can focus a little bit more on cost. That quality and reliability of service is really bringing up some very real benefits. So, we are seeing some strength at our existing customers but more importantly, we are seeing a number of new customers and I really want to emphasize this idea that I think as the US market softens, there seems to be a recommitment to global market across the board and we are seeing not just the IC area but lot of it we call our enterprise role of life sciences and our other end market application as well. So, that is the 2009, we have about a nine-month sell cycle here so the things that we are seeing right now, it really begin to see in 2009.

Brian Kinstlinger - Sidoti & Company

Is that nine-month-sell cycle the same as the year ago or less than or..?

Rory Cowan

I think just about the same. Small guys, it is a little bit faster because they are moving a little bit faster. So, the large folks as globalization becomes a higher component of a corporate strategy, they are a lot more thoughtful in their process, a lot more thoughtful in picking a partner of scale.

Brian Kinstlinger - Sidoti & Company

And you mentioned, this is my last question, I will get back in the queue, you mentioned Microsoft and Google, being both of your top two customers are growing nicely. Is that product driven? It sounds like Google is more that search engine driven but is one of them more product driven that cost a temporary surge is there is something else to think about?

Rory Cowan

No, I think it is just broad base demand. If you talk about Google, what are their products of course, we do all sorts of things with Google as you see and with Microsoft that we have a very deep and broad relationship. Much of it is content, much of it is product. Again, I think that they are just the firmness of global markets right now and I do not want to runaway with things for 2009. I will get crazy but we are seeing a first time. We are seeing some very real firmness in the business that allows us to look inside the manage process a little bit more confident now.

Operator

Our next question comes from Randy Hugen - Piper Jaffray.

Randy Hugen - Piper Jaffray

What was organic growth from the quarter and what is implied in the Q3 guidance?

Rory Cowan

Year-over-year I think we mentioned that it was 3% organic growth tax currency impact. And what was the second part of your question?

Randy Hugen - Piper Jaffray

What is implied in that Q3 guidance for organic growth?

Rory Cowan

It is probably about the same. And again, Randy, I mean, if you look at year-over-year organic but really again is there was a sequential orientation that we are looking for the year. Last year has been, this year is now. So, focus on your numbers but we are looking for the whole year here.

Randy Hugen - Piper Jaffray

Alright, and do you feel that you work on the tax issue is finally behind you here 35%? Is that a reasonable range for our FY 2009?

Donald Muir

No, we really have not given any full guidance beyond this year but what I had stated I think back in the fourth quarter earnings release conference call is that we expect to have much more normalized effective tax rate once we start to generate the pretax income within a meaningful fashion that we should be well positioned to kind of mid20s type of tax rate going forward beyond 2009. We are still working on some things that you could see there is still some fluidity in the tax line and then certainly going in the right direction of course and we have made a lot of progress. In going forward once we generate some profitability, I think we will have some very appealing tax rate as compared to other multinational corporations.

Randy Hugen - Piper Jaffray

Okay and then did you see any change in client buying behavior during the quarter? Anybody delaying a project starts or RFPs?

Rory Cowan

No, I think I mentioned we really have not seen much change although the newer customers are looking at this rather than an episodic sort of progress project base model and looking at it more of a relationship sort of VPO sort of initiatives. So, that is why it takes a little bit longer to close some of those things where that nine-month sell cycle plus or minus a month or so but I think in general, there is a firmer orientation to an export markets.

Randy Hugen - Piper Jaffray

So, you mentioned you expect margins to be flatly up for the second half of the year compared to first half and obviously revenue down a little bit sequentially. So, I guess it is just reasonable to assume that margins down a little bit sequentially in the third quarter from the second quarter and then taking back up on fourth quarter on the seasonal strength.

Rory Cowan

I think that right now looking at a pretty flattish, maybe I am just slightly gross margin in third quarter and maybe a little bit of a further uptake in Q4 given the volume increase.

Operator

Your next question comes from Joseph Vafi - Jefferies & Co.

Joseph Vafi - Jefferies & Co.

Well, the markets to markets, on the top line 6% organic increase here, was there any specific customers that stood out there as a driver of that sequential increase or would you call it more of a broad base increase?

Rory Cowan

I think that we mentioned that it is really our large, top couple of customers where the real strength is. Really the strongest year-on-year growths are all the names you might expect in our filing. It is Microsoft, Google, Nokia, Sony, Pearson, all the normal guys that we have been focusing on much really reinforces the long term nature of these relationships particularly when you start getting the quality ratings and the reliability ratings that we have been able to achieve.

Joseph Vafi - Jefferies & Co.

Okay and then on the quality ratings commentary, is this I did not really hear about this so much in the past, has there been an improvement in the Lionbridge ratings or are the ratings starting to matter more and how broad base is this ratings analysis or commentary used by customers in dealing with some of their localization vendors?

Rory Cowan

We should have been more precise with it. I think there are two types of ratings. First, we have deployed at the beginning of last year. We started this process of worldwide ratings internally for performance versus customer expectations. So, we build up a database. It is very, very strong about expectations. Secondly so and that is increase broad base. Second issue is number of our customers have become much more sophisticated just as they done on the IC services world, [3253], Impetus's, HLCs and others give rating vendor performance whenever you have multi line arrangements and many of our larger customers are now sharing those ratings across divisions with us and we are delighted where we are standing. So, it is broad base from our view but customers specific.

Is it becoming more important is your question, we think so. Given that we have distinguished ourselves across these ratings, I think that is a direct attributer to a lot of growth. Last year, we are managing currency and managing internal things that perhaps we were not as focused as we might have been. We put the clutch in, shifted toward a different gear here and focus on customers I think that is beginning to payback in great terms for 2009.

Joseph Vafi - Jefferies & Co.

Okay that is helpful and then maybe just a couple other quick ones here. We are starting to talk about some customer ramps both new and existing. Should we be, is there maybe a reason in why we are not seeing maybe a stronger top line emerge here in the second half?

Rory Cowan

Yes, I think as I mentioned, a lot of the wins have been very large programs and that is really just a question of when they kick in, Joe. Customers signing the contract, you have the celebration party, everybody said it is great and then, Scandinavia for example they take July off; France, they take August off, in the US it is squarely second half of the year around Labor Day. People just do not get back to doing their jobs even though you pay for the contracts and that is why I said, it really depends on how fast the flywheel spin in September.

Joseph Vafi - Jefferies & Co.

Okay, that is helpful and then if we do look at some of these new ramps and maybe specially with new customers, should we be looking at kind of initial, kind of cost kicking in before revenue or with any big new project ramp created in any kind of short term margin pressure.

Rory Cowan

I do not think so. That used to happen with our GDT business but as we move all of that to India and as we focus more of that world on the sort of search relevancy and also just other global programs, the step curve cost component at the beginning of a project, the model seems to softening Joe now. I do not want to say it is over but it is not the way it was two years ago.

Operator

Your next question comes from Mat McCormack – FBR.

Mat McCormack - FBR

In terms of the commentary about you are seeing demand really for the export market, can you talk about which ones exactly are driving that? Is it Asia, the Latin America or Eastern Europe?

Rory Cowan

They really depend on segment. For example, some of the, you might want to talk about various segments in the software industry. There are certain software segments that are really have been largely domestically. If I think about HR and management software largely domestic initiatives because of labor laws around the world and make that a product line that is a little bit more difficult to support internationally. When it does support internationally, it tends to be the tier-one markets; Europe, Japan, elsewhere. Whereas things that are like clinical research organizations or that sort of trial work that is a lot of developing nation activity because it ports now international data can be use for domestic growth applications.

For the wireless handset business, very broad, that can give you a 100 hundred language. As I mentioned the search engine industry and in the keyword and the research business can be a 100 different languages so really it is about set up by each individual into the segment and I think as we have gone larger and now we sort of looking at the segment orientation in our GLC business for 2009 and 2010, they really begin to think about the intimate nature of each of these end markets.

Mat McCormack - FBR

Okay and obviously commentary about the state of the business is very positive. It looks like we are in a down cycle with at least the US economy and probably global. I guess, anecdotally, can you talk about the business now versus the state of the business during the last cycle where it was more, I guess, project or product cycle focused and you talked about 80% being repeat customers but what percentage of your business is recurring versus dependent on product cycle and just generally your visibility at this time compared to say 5 years ago?

Rory Cowan

I think that is a great question because you are right. If we think five years ago, global internet penetration, everyone was talking about it but it really had not hit the numbers that it should have achieved probably been reading that the US is now 15th in broadband penetration of worldwide that is 15th. So you got a sense of the role of broadband penetration worldwide. The addition of the net means more streaming content, meaning lots and lots of smaller files first. Secondly, the adoption of standards XML, HTML and others also reinforces streaming content. Third, our technology infrastructure putting more data in the cloud is building a deeper, longer term relationship versus five years ago in the downturn which was really more project base so your question is spot on, we are feeling is that we are much more integrated and that the customers have much greater commitment to international market.

Operator

Your next question comes from Richard Baldry - Canaccord Adams.

Richard Baldry - Canaccord Adams

Two questions on the cost side. I am curious whether you think the cost of the hedging program is helpful to comedown now that we start of maybe coming to a more stable range on currencies and then on the external cost side. Can you talk a little bit about India and whether we see anecdotally in the press any way that it seems to be some wage inflation there sort of do you see that yourself and how do you see that playing out going forward? Thanks.

Donald Muir

Yes, I think that we are going to continue to see some the class related to hedging which are de minimis. It is really trying to mitigate that the risk whether it is up or down and that is our objective is to really flatten this thing out. So, we are going to have to spend this small amount of money with our hedging program going forward. I think the objective here is to neutralize that other income expense line which we have certainly in the last quarter.

Rory Cowan

Regarding India, I think that we are seeing, let me clearly talk about India wage inflation, although, I will say anecdotally now that with the sort of reconfiguration of the US financial services market, real estate market where a lot of the demand in India was financially rated for BPO and IT development. Therefore that business is down considerably but following the Indian market, stock market it is down about a 40% year on year, it is one of the worse performing markets worldwide now. As a result I think that the wage inflation is certainly minimizing and you hear that in the calls from all the majors as well. So, is there is still wage demand there? Absolutely, as in many developing nation but it is not the way it was two years ago so we think we are going to have a fairly stable market during the next year or so.

Richard Baldry - Canaccord Adams

Last question would be given the things like international market are more of a focus or the Company is looking to try to weather the storm. Can you talk about whether that is bringing in material numbers of new customer that you have not dealt with prior I do not know if you want to think about pattern under a year-over-year basis or sequential to sort of give us a feel for organic growth underlying the move into 2009? Thanks?

Rory Cowan

In fact, something we have been thinking about is how to quantify new customers because we are seeing, as I mentioned earlier, these are larger initial relationship that I think they have been in the past so it maybe fewer, larger new customers that is just like people are buying. So, we will spend some time thinking about maybe when we close out this year, we can see how much business is coming from customers collectively we did not have a year ago or we will work up some metric to try to figure out how to fill that growth. We do have about 22 more customers than we had last quarter but again that is hard to say because some of them may just be spot the customers, some of them may just be the first part of the ramp and we got to get you guys a better data on this rather just customer knowledge because as I have pointed out, the underlying nature of our demand seems to be changing for the larger, stronger, deeper relationships.

Operator

Your next question is a follow-up from Brian Kinstlinger - Sidoti & Company.

Brian Kinstlinger - Sidoti & Company

Don, DSO looks great. I am just curious, is this sustainable, could it get better? Will it be choppy from here? Just give us a sense on how to manage the DSO going forward and what do you think about it?

Donald Muir

Well, it is really working hard at it. We had a very solid effort in the second quarter with the finance team, the operations folks and the sales folks, really concentrating on collecting receivable. So, I try to do a better job of getting invoices out on time. We are just doing a lot of fundamental blocking and tackling around cash flow and we are going to have to tend to continue that and where we improve 59 days is pretty good. I would like to see improvement and we are going to drive some more improvement but that is a pretty tough holdings. So, we are focus on it and it is a key measurement through all the players in the Company and we are going to try to accelerate cash flow going forward.

Brian Kinstlinger - Sidoti & Company

And what was CapEx for the quarter and what is your expectation for the year?

Donald Muir

Well, $2.1 million in the quarter. So, that brings us $4.5 million to $5 million for the half and if I would not spend equate the rate for the year, we got a $6 million to $7 million for the year.

Brian Kinstlinger - Sidoti & Company

In terms of locale, you mentioned that is one of the drivers to the increases to the margins. I am curious a long time ago we are focused on this talking about the percentage of your business being processable before, do you have any update, statistics maybe compared to last year?

Donald Muir

Yes, we are taking a look at that model as well Brian because we are again to pull Logoport in new and unusual ways so the number of words processed I think were about it is 60 million or 70 million words this quarter per month. I think it is about in the 60% of our total business right now.

Brian Kinstlinger - Sidoti & Company

Is that about 50 last year, is that what it was?

Donald Muir

Around 45% to 50% that sort of range.

Brian Kinstlinger - Sidoti & Company

Great and can you update us some of the facilities I think you had one expired the lease and you were closing it down where that is and is there anything on the horizon for that or restructuring otherwise go that line towards year or give us a sense of that?

Rory Cowan

I think as we mentioned, we are focused on looking at a number of opportunities globally and some in Europe, we cannot really be very specifics, suffice it to say that every time a lease expires, we are trying to take rest with footage. We are trying to reduce the rental expense. We are trying to get the people to work at their home and we have been somewhat successful with doing that.

Brian Kinstlinger - Sidoti & Company

Are there a number of leases coming up in the next 12 months?

Rory Cowan

Yes, there are few. We have some lease that is like 50 or 60 leases around the world so there is always something coming up around here, Brian.

Brian Kinstlinger - Sidoti & Company

Can you give us a sense just as we follow the industry breakdown of revenue, technology, life sciences, whatever it is that it breaks down possibly before?

Rory Cowan

Yes, I think Brian that is something I think we are going to think about for 2009 as we really begin to look at the business now. In other words, scale, we are going to think about end market demand that it is about 35% or 40% technology and then 70% all other but you need more than all other.

It looks as though we have answered all your questions. Thanks very much as always. If you have any further questions as you refine your models and other things, give Sara Buda a call and she will make certain that she or Don or I are available. So, thanks an awful lot for your time this morning.

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Source: Lionbridge Technologies, Inc. Q2 2008 Earnings Call Transcript
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