Lionbridge's CEO Discusses Q1 2012 Results - Earnings Call Transcript

This article is now exclusive for PRO subscribers.

Lionbridge Technologies, Inc. (NASDAQ:LIOX) Q1 2012 Earnings Call May 8, 2012 9:00 AM ET


Rory Cowan - Chairman & Chief Executive Officer

Don Muir - Chief Financial Officer, Senior Vice President

Sara Buda - Vice President, Investor Relations


Amit Singh - Jefferies

Vincent Colicchio - Noble Financial

Sarkis Sherbetchyan - B. Riley & Co.

Rich Baldry - Wunderlich Securities


Welcome and thank you for standing by. At this time all participants are in a listen-only mode. After presentation we will conduct a question-and-answer session. (Operator Instructions).

I would now like to turn the call over to Sara Buda, Vice President, Investor Relations. Ma’am, you may begin.

Sara Buda

Thank you and welcome everybody to the Lionbridge Investor call to discuss financial results for the first quarter of 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 have disclosed in greater detail in our Form 10-K filed with the Securities and Exchange Commission on March 14, 2012 the factors that may cause such differences.

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

Rory Cowan

Hi, good morning everyone and thank you Sarah. First, I’m not calling in from a bathysphere. I’m at the tail end of a spring cold, so I apologize for my voice, but I think we’ll be in good shape, so.

Today we’ll talk about our positive Q1 results and our strong demand environment across all markets and pretty much all offerings. Then of course Don will walk through the specifics of the financials in detail and then I’ll give a quick summary, so.

I think in general it was a workman like quarter with very good results. We grew our top line about 12% year-on-year with Q1 revenue coming at about $112 million, well above our forecast. Many of our existing clients are really strengthening ahead of plan and we are also scaling to new business across vertical markets, which I’ll talk about a little bit later in my comments.

We grew gross margins about 200 basis points year-over-year and there still is some room for improvement there as well and we delivered our GAAP earnings of about $0.03 a share. In fact, we grew GAAP profit by about $7 million or $0.12 a share year-on-year on $12 million of incremental revenue. So that’s $7 million of going back to the bottom line on incremental $12 million of revenue.

This marks another quarter of strong revenue and year-on-year earnings growth and we expect this positive trend to continue as we go into Q2 as Don will talk about and I’ll talk about, we are seeing some continued firmness.

So let me touch on our demand environment that’s leading to this strong start of the year. First, our revenue is gaining strong momentum in three key areas. First is tech and we are beginning to look at the tech sector really in two discrete areas, consumer tech and enterprise tech.

Consumer tech seems to have the strongest growth opportunity. I think as we are seeing sort of overall. In Q1 we saw solid revenue growth from names like Google, Samsung, HP and we saw a well-known west coast consumer device manufacturer. Many of our largest consumer tech accounts are growing nicely or some of our large enterprise tech accounts are generally flat, up or down a couple of percentage points depending upon where they are in their product life cycles.

The second major category is life sciences. In 2011 we made some changes for our sales delivery organization to align this business around certain momentum of verticals. Our life sciences team is really the first one of these that’s getting its sea lengths (ph) and is clearly benefiting from this new org structure.

Our proven dedicated expertise in this domain and concentrating that among a few delivery centers and with a core sales team and a separate general manager winning new business and growing accounts in the contract research sector and also with medical device clients and we also recently secured a new win at a very large pharma company. So our investments and focus on last year in the life sciences area are paying off and I think we’ll find another vertical in 2012 and do the same thing to set us up for 2013.

The third sort of end market domain is really manufacturing. This is becoming an area of very real strength for us from automotive accounts to the mature of the U.S. industrials and it’s clear that the manufacturing vertical continues to offer a strong growth opportunity. This is particularly evident in the mid western U.S., in which we’re seeing a very real resurgence of demand. In addition for both our domestic market, things like our content offering and other areas and also in our export markets for things like localization.

These U.S. manufacturers develop, distribute and direct new products that are increasingly digital and increasingly global. So in many ways these industrial companies have the traditional demand of globalization, but now on top of that are those digital components that behaves really quite a lot like software and so they are beginning to confront the globalization and simultaneous release challenges that the software industry dealt with a decade or so ago.

So our unique skills enable them to engage and support their customers globally and going forward we expect to further expand our business in this market with organic growth and potentially some tuck in acquisitions in this region that give us some of the established relationships that we can build on. So our tech, life sciences, manufacturing, those have really been the three big thrusts for us and continue to be this year.

We are also gaining momentum on some horizontal offerings and the first of which really is our global marketing operations business or GMO as we call it. As a reminder, we launched GMO last year when we saw a growing demand for marketing executives, are looking for a single partner that can create, deploy, translate and optimize our online marketing content across languages and technical platforms.

It seems that many of these global companies have this web of offers, web of technology platforms, web of marketing initiatives and it isn’t just a simple technology initiative knitted it all together. They need an outsourced partner that can work with each country, work with each platform, work with each internal stakeholder to simultaneously or accelerate their global offerings.

We started formulating this offer with dedicated sales offerings and marketing programs a few months ago and now GMO really is becoming one of our strongest areas. We are expanding business with many of our existing clients and we are winning new clients across industries, including consumer, travel and tech. In most cases we are selling GMO to the marketing department, which is a new DMU, Decision Making Unit for us, not the traditional templation wire.

As the value proposition for GMO is much broader and involves a variety of our global capabilities, so translation is a kind of feature and a completely different offering that builds on our global infrastructure. I’m encouraged by the early momentum of this offering, as well as our vertical market strategies.

So before I turn it over to Don, let me also give you a brief update on our GeoFluent, SaaS technology. As you bring GeoFluent to market, we are learning three important lessons. The first is we are focusing on the highest ROI application. There is a lot of interest in machine translation, but when it comes to deploying the technology to drive business results, clients really are focused in two areas, our online chat and forums, because forums are becoming a new breed of customer care with great, great efficiency for both users, customers and providers.

This can significantly reduce the support cost and improve customer satisfaction in these global markets. So we have refined our sales strategy to focus on customer care department of large enterprises or customer care departments of rapidly growing our new tech firms.

Secondly, when learning that this is a channel sale, people have committed to various technology infrastructures and they have to bolt this offering into those infrastructures. Our partnership strategy really reflects this. You saw that we announced a partnership with live person, which is a market leader and online chat. That really continues to sprightly with lots of lead sharing and lots of joint customer calls. And in Q1 we started with another partnership with Moxie, a leader in enterprise social software, that’s a sort of forum approach and as a result our pipeline of joint opportunities is really beginning to ramp nicely.

I think the third issue that we found is that younger high growth companies often have shorter sales cycles. This is classic installed base problem of as we work with established enterprises, they have the biggest cost saving opportunity, but they also have the biggest reengineering challenge. So those selling cycles are quite long. So if you work on with these smaller companies of course, they begin, they have no installed base, they can grow very quickly and deploy this technology in a few weeks.

So in fact we recently secured a new win for GeoFluent with a leading on online gaming, that will implement multilingual chat and we are very excited about this, because the early indications are the savings are there, the customer response time is there, the quality is there, all the indicators are green for this new application for a new rapidly growing company and we see that we have several other emerging companies in our pipeline.

So GeoFluent partnerships are accelerating. We are finding new opportunities with shorter sales cycle and I’m encouraged, and we are really beginning to convert the interest of this technology into revenue.

So before I turn it over to Don, just a few key points. First, we grew revenue 12% year-on-year, making it one of our strongest first quarters in history. As you know Q1 is generally a little light for us. And I think the reasons for that are investments in sales and marketing are paying off, our new GMO offering is ramping ahead of plan and technology initiatives are beginning to gel and getting a significant interest and lastly, we accelerate profits with yet another quarter of strong year-on-year earnings growth, as all of our cost actions and all of our growth initiatives are really beginning to gel.

So Don, I’ll turn it over to you.

Don Muir

Thanks Rory and hello everyone. Today I’m going to walk though our Q1 results, which reflect a strong start to 2012 and I’ll also provide an outlook for Q2. Let me start with an overview of the first quarter.

We delivered revenue of $112.1 million in Q1 with 12% year-on-year growth. This is one of our strongest Q1’s in our history, as many accounts strengthen ahead of plan. For the past three years we reported between 7% and 12% year-on-year revenue growth, so I’m quite pleased with our overall business momentum.

Demand is strengthening and we are clearly executing better on sales and market. It is also heartening to see that the growth is broad based across segments. In Q1 our GLC language business was up 12%, our GDT testing segment was up 17% and interpretations grew 1% year-on-year.

Gross margin was 30.3% for the quarter; this is about 200 basis points higher than a year ago. Margins in our GLC language business was 31.6%, margins in our GDT testing business were 29.4% and interrupts was 17.5%.

Gross margins were down sequentially from Q4 as we expected. This primarily reflects normal Q1 seasonality, the ramp-up of new programs and the fact we have been somewhat more aggressive in the market in order to successfully drive higher revenue.

We continue to mange our operating expenses, even with the strong revenue growth. Operating expenses declined by over 200 basis points year-over-year as a percentage of revenue to about 28% excluding restructuring. We delivered $2.8 million of operating income ex restructuring. This marks an improvement of $5 million from a year ago. Clearly we are starting to see operational improvement as revenues strengthens and our cost management continues.

Other expenses were down on what’s $500,000 year-over-year. This reflects the benefit of foreign currency exchange rate movements that’s favorably impacted our quarterly balance sheet with valuations in the quarter.

Our tax provision was about $600,000, which was in line with our expectations. GAAP net income was $1.7 million or $0.03 per share for the quarter. This marks the improvement of over $7 million or $0.12 compared to last year’s Q1.

Over the past several quarters we’ve delivered very positive year-on-year profit growth. In fact our trailing four quarters GAAP earnings totaled over $0.17 per share of tax restructuring and we generated $0.31 per share on non-GAAP earnings over the past four quarters.

This is the strongest profit trend I’ve seen since joining the company over four years ago and it’s all about revenue growth. This quarter over 40% of incremental revenue converted directly to net income year-on-year ex restructuring. So I’m quite pleased with our committed track record of delivering both revenue and profit growth year-over-year.

Moving to the balance sheet, looking at cash flow from operations, we consumed about $4 million in cash this quarter and strong top line revenue growth increased receivables and working capital. Despite this Q1 cash usage, we do expect that we solve the cash flow positive in Q2 and for the full year.

We ended the quarter with about $20 million in cash, debt remains unchanged just under $25 million and capital spending was $1.3 million in the first quarter. DSOs were 51 days, a slight up tick of about two days from Q4, driven primarily from the strength of March revenue, which skewed our demand linearity to the third month of the quarter. We continue to manage DSOs in the 50-day range, which is quite positive considering the global nature of our business.

Regarding uses of cash for the remainder of 2012, in addition to the ongoing funding of our growth, we’ll likely be focusing on two areas; one, the final stages of our restructuring program. In Q2 we planned to close our production operations in one of our European locals. We expect this to be the last major piece of our $18 million to $20 million restructuring program that we announced a few years ago. So in Q2 you will likely see between $2.5 million to $3 million of restructuring expense on the P&L. However, as we said, this should be the last phase of this program, so I would expect minimal restructuring expenses going forward.

The second use of cash maybe in the area of M&A. As Rory said, there could be some small tuck in acquisitions that would further bolster our vertical market expansion strategy. We tend to look for companies that have established client relationships in the key vertical and it can be quickly accretive to earnings with little integration expense. So you may hear more from us in the coming months as we continue to look at ways to accelerate our growth, both organically and through smaller acquisitions.

Let me wrap up by talking about our outlet for the second quarter. For Q2 we estimated revenue of $113 million to $116 million, with growth from both new and existing customers and we expect about 50 to 100 basis points of gross margin improvement year-on-year in Q2 and likely for the full year of 2012.

So to summarize at a high level, we had a very strong first quarter. Revenue was strong with 12% top line growth coming from all areas of the business. We saw strong margin improvement year-on-year, thanks to increased revenue volume and cost management. Our GAAP net income improvement over $7 million year-over-year as our incremental revenue converted positively to the bottom line. We continue to manage our cash, while investing appropriately in growing the business.

Now Rory, back to you.

Rory Cowan

Well thanks Don and I don’t really think there’s much to add to that. I mean revenue is growing again. All of the cost actions are allowing us to convert that growth to year-on-year earnings growth and we are bringing new offerings to market to further accelerate our growth and profitability.

I would like to take just one moment and talk about Q2 and our restructuring. We’ve been working with the work councils in an area in France. We’ve reached agreement with them and these things take six or nine months. We’ve been talking to you about that for quite a while. Every quarter we sort of mentioned it and we should get that tied up in Q2. We are just getting better at what we do, so I think that we’re able to get more of our traditional business, we’re able to get more revenue through the system with fewer people, which I think is what we all want to see.

So with that Sara, we should turn it over to questions.

Question-and-Answer Session


(Operator Instructions). Our first question comes from Jason Kupferberg of Jefferies.

Amit Singh - Jefferies

Hi, this is Amit Singh for Jason Kupferberg. I had a quick question regarding the 2Q guidance. I mean this quarter of course we saw good revenue growth as you mentioned the consumer tech, life sciences and manufacturing and when I look at this top line guidance for revenue for 2Q, the quarter-on-quarter growth is, if I look at the mid point closer to 2%. So I just wanted to get a little more sense of a relatively slow quarter-over-quarter growth for the second quarter. I mean, if you can mix it, the type of demand environment your seeing or if even anything related to that.

Rory Cowan

Great, thanks. I’ll start and then I’ll turn it over to Don. Listen, we had a good Q1, I don’t want to start swinging from the chandeliers. Q2 look firm. There is some uncertainty around the world right now and I think the Q2 numbers we have on the street right now, we feel comfortable with and I think I will look at the strong Q1 as giving us increased confidence in achieving our year long revenue guidance. Don, do you have anything to add to that?

Don Muir

Yes, we had a very strong sequential growth in Q2 of last year, of 13%, so that makes it a little bit more difficult year-over-year comparison, so I think that’s what you are seeing the year-over-year growth rate.

Amit Singh - Jefferies

Also on the sort of year-over-year guidance still stays I guess in the 5% to 10% growth range.

Rory Cowan


Amit Singh - Jefferies

All right, perfect. Thank you very much.


Our next question comes from Vincent Colicchio of Noble Financial.

Vincent Colicchio - Noble Financial

Yes, Rory can you talk about the revenue contribution of the two SaaS products or may be if don’t want to talk about that for that quarter, what are the goals for the year if that’s changed.

Rory Cowan

Yes I will, I think that we are seeing, well we are still looking to exit the year with about a $5 million run rate. These aren’t fast products, so they build every quarter. We’ve had some good wins in our traditional SaaS product with our transnational workspace, that’s growing nicely and we are beginning to put numbers on the board now for the GeoFluent product as well.

We had three paid pilot wins and the subscription of course, revenues was again on those things. The way these work is, if you do a pilot, if they are successful then they convert to subscriptions is the model, so or the paid pilot pays for this. But we are beginning to get traction. I mean it’s clear that we refocused our go to market efforts really around two key areas. First, we are doing a broad scatter short and now as I said, it’s all about real time chat and real time multilingual forums.

We are beginning to see the support industry migrate to chat, which is a high value added application, because its one-to-one and forums are a very efficient means of providing customer support, because if someone curates the forums, so its one too many and people are trying to get their global communities on issues, rather than focus on a particular contact center interaction. So it’s almost chat is the high end, the high quality application, forums are the more broad based application for the two.

Vincent Colicchio - Noble Financial

And then Rory you had mentioned that you are getting a nice return for your investment in the life sciences vertical and may be a new vertical you’ll focus on this year. Any help in terms of where that may be.

Rory Cowan

Yes, we are beginning to look pretty seriously at this global manufacturing vertical or industrial vertical. I think we’ve been so focused on tech in this economy and as we now begin to see things shifting towards the digital components of industrial products, we are getting quite a lot of traction there around the entire customer lifecycle.

Remember we focus on our customers, customer lifecycle. So we help them develop products, test them, translate, localize them and support those products and this industrial world really is looking up to be quite, quite firm.

Vincent Colicchio - Noble Financial

And I think you said Rory that you – I think Don you had said that you got more aggressive on pricing in the quarter to benefit yourself on the volume side. Is that in response so any competitive change or is that just an independent decision.

Rory Cowan

I think we are beginning to see, you know as Don said, what we are seeing now is that people are converting instead of a one-year product based commitment. People are now looking at sort of multi year commitments and I know that when I get my teeth into a customer I can bring real value to them and much more efficiency on our side. So that being a little bit more aggressive on price early, I then have a much more stable revenue stream and I can invest in that customer relationship now to reduce cost and efficiently and provide efficiencies jointly. Don.

Don Muir

I think that pretty much sums it up Rory, and that’s what I was referring to when I said that we are being more aggressive in the market.

Vincent Colicchio - Noble Financial

Okay, and one last question Don, just to understand correctly the restructuring cost should be $2.5 million to $3 million in the 2Q and then quite minimal after that going forward.

Rory Cowan

Yes, that’s correct.

Vincent Colicchio - Noble Financial

Okay. Thanks guys.

Rory Cowan

Okay. Thanks.


(Operator Instructions) Our next question comes from Sarkis Sherbetchyan of B. Riley & Co.

Sarkis Sherbetchyan - B. Riley & Co.

Hi, good morning gentlemen.

Rory Cowan


Sarkis Sherbetchyan - B. Riley & Co.

So it sounds like the global marketing services are gaining some nice traction. So can you share some information on any sizable engagements you’ve won or you anticipate to win.

Rory Cowan

Yes, the way GMO works is, what we are finding is that in this initial surge of the global web, are my large global companies. Each country or each division set up their own web presence with lots of individual micro sites and contradictory branding.

Now as people are beginning to release products globally and have global campaigns, they need to knit all of this together, so that you can have a consistent brand with local sensitivity. So for people like a large and a name brand coffee company in the Pacific North West, they have websites in 20 different counties, five of six different content, web content management systems and there is no way they are going to solve this problem with software only.

So what they’ve come to us to work with to say, why don’t you help us take our concepts, offer it locally so it has a consistent global branding voice, but then its also locally relevant, that’s one application.

So another application for our largest customer and a couple of their divisions, they’ve come to us and said, well gee, we want to do some global campaigns around certain pieces of software, can you do both of those and these run anywhere from a $1 million to $2 million a year to even more per year.

Another one might be well known, a router manufacturer. They have lots of micro sties around the world, one for each product and this a gateway to introducing the product, its also a gateway to their support activities, so we are actually engineering, creating and maintaining these micro sites for them around the world, so lots of flavors.

And then the industrial world, you’ll see an application for this. We have all this technology marketing material. So lets say you are an engine manufacturer in the mid west and a Korean company wants to put your engine inside of their road construction equipment. There is a platter of industrial knowledge and fitting knowledge and technical knowledge that needs to be available in multiple languages and needs to be maintained around the world, that’s again another example of the GMO activity.

Sarkis Sherbetchyan - B. Riley & Co.

Okay, that’s helpful and maybe if you can expand on your joint sales efforts with partners for GO clients. I know you kind of talked about that earlier in the prepared remarks, but how have those efforts progressed? Have the partners’ generated leads of revenues that you can see here.

Rory Cowan

Yes, we seem to be in the, what I’ll call the party season. Each one of these platform guys is holding their user group conference right now around the world. We are attending those user groups with them, we are putting joint offerings together, we are dealing with joint customers. We are interacting with our customer councils and we are seeing not surprisingly very, very positive response from our focused efforts with these platform applications, with specific end market applications. I think that’s where we are right now in the phase.

A lot of joint sales lead process going back and forward and so the teams are really working together as I said. Live chat and forums, those are really the two focus and of course that means that there is – we are optimizing our technology to work seamlessly with these various platforms.

Sarkis Sherbetchyan - B. Riley & Co.

Okay, that’s nice to hear. And then when you look at where you anticipate the bulk of your revenue growth coming from, is it really new projects and new customers or will it kind of revert back to your larger top five, top 10 customers contributing such as the Microsoft to the world.

Rory Cowan

You know that’s a hard one to call. It seems to be a pretty broad based. I think that our new business acquisition, our vertical market strategy is bringing us some new customers, but also some of our core customers. We are getting better penetration and better execution, so it seems to be pretty well based right now.

Sarkis Sherbetchyan - B. Riley & Co.

Okay and finally some customers are experiencing issues out in the public and I was wondering if your relationships with any of those customers have changed.

Rory Cowan

Yes, I know that – for example we have a long-standing relationship with a large European cell phone manufacturer that you may be referring to. And you have to remember that more of our services are fixed spending, meaning if they are going to release a product in say Korea, they have to spend with us independent on units sold in their county. So even if their market share goes down, they still have to spend with us for the entire product localization and infrastructure support.

So yes, when companies have some challenges with their end markets, the way they mange cost with us is they will just release fewer products or may be cut back on some of the marketing or e-learning applications, but our core relationships has to remain firm with them, because if its not in Korean or Thai or Chinese or Japanese, it just won’t sell. That’s also why we are beginning to bifurcate our thinking from consumer tech toward industrial tech or big tech.

Sarkis Sherbetchyan - B. Riley & Co.

Okay, thank you very much.

Rory Cowan



Our next question comes from Rich Baldry, Wunderlich Securities.

Rich Baldry - Wunderlich Securities

Thanks. On the expense side, I was wondering if you could talk a little bit about sort of maybe the balance between seasonally higher spending, sort of get ready for the year ahead, versus some high cost associated with newer ramping programs. If I look at $5 million sequential revenue increase, there’s roughly a $6.5 million spending, slightly delevered in the quarter.

So to what extent for the rest of the year, may be this is a base line OpEx dollar figure that could hold steady, may be even decline with some of the restructuring which we are taking in Europe. So we’ll get an idea for spending through the rest of the year, thanks.

Don Muir

The restructuring in Europe will primarily be focused on the cost of revenue as opposed to the global line property expenses Rich and I think where we are in Q1, that kind of 28% of the revenue is a good number, although we are working hard to sustain as you said a flatness across the board in G&A particularly.

Sales and marketing will more likely vary with revenue as we talk. Historically, we are shooting for about 8% to revenue type of a number there, plus or minus. So I think you’ll see kind of flatness in G&A as would be our goal and then you are going to see sales and marketing would be varying with revenue and the restructuring effort should be focused on taking some of the fixed cost infrastructure out of our internal cost of sales.

Rory Cowan

And I think Rich, I would look at that as a training 12 average, not a sequential quarter-on-quarter number, because end of the year we are always truing up some thing and you get things going both ways and at the beginning of the year we realized you point out and launched some programs that should have some value later in the year.

Rich Baldry - Wunderlich Securities

Thanks. Congrats on the revenue mark.

Rory Cowan

Great, thanks.


At this time there are no other questions.

Rory Cowan

Great everybody. Thanks very much and again, if you have any questions you all know where to reach Sara and she knows how to get through to Don and me for the rest of the day and the rest of the week. So thanks very much.


This does conclude today’s conference call. You may disconnect your phones at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to All other use is prohibited.


If you have any additional questions about our online transcripts, please contact us at: Thank you!