Lionbridge ( LIOX)

Q1 2011 Earnings Call

May 9, 2011 9:00 a.m. ET

Executives

Sara Buda – VP, IR

Rory Cowan – Chairman, President and CEO

Don Muir – SVP and CFO

Analysts

Joseph Vafi – Jefferies & Co

Richard Davis - Canaccord

[Sarbi Sharbashan] - B. Riley & Company

Vincent Colicchio – Noble Financial

Harvey Poppel - Poptech LP

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions.] Now I would like to turn the call over to your speaker, Sara Buda, vice president of investor relations. You may begin.

Sara Buda – VP, IR

Thank you. Welcome to the Lionbridge investor call to discuss financial results for the first quarter of 2011. During this call, we may make certain statements that may be considered forward-looking statements under Federal Securities laws and which involve risks and uncertainties.

Our actual future results may differ significantly from the matters discussed in any forward-looking statements. We’ve disclosed in greater detail in our Form 10-K filed with the Securities and Exchange Commission on March 15, 2011 the factors that may cause such differences.

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

Rory Cowan – Chairman, President and CEO

Thanks Sara. Good morning everybody. Thanks for joining us on Monday morning. Today I'd like to talk about three things about the quarter the rest of the year. First, our Q1 results and the strengthening demand environment. Second, the trends that are driving this positive outlook for second quarter and second half, which are accelerating revenue and earnings. And third, a brief update on our Geofluent SAS technology offerings.

So first let me summarize the quarter. As you can see, we delivered revenue of about $100 million, within our expected range, and this is despite a $7 million year-on-year decline from our top two accounts due to their product portfolio transitions.

This is what we had been communicating for the past couple of quarters, and I was pleased to see that we were able to offset this temporary decline with new business growth from accounts like HP, RIM, Dell, and Phillips, as well as additional volume in our interpretation segment. So the sales engine that we began to invest in a couple of quarters ago is really finally beginning to kick in.

A second issue, you can see from our stronger than expected revenue forecast for Q2, we expect Q1 to be the end of our three-quarter revenue flatness. This is a little earlier than I had actually thought, but our second quarter revenue is ramping above plan, for two reasons. First, growth from our recent new business wins, as I mentioned above, and strengthening demand from our major accounts. It seems if these are coming in a month or two sooner than we had anticipated.

I'll get into the details of Q2 shortly, but it's clear that we're seeing a broad-based demand across all of our segments. Q1 gross margins were below planned. They were a little bit of a disappointment, but we've seen this before. And this is due to a ramp of new accounts and segment and customer mix during the quarter. We expect these margins to improve in the second quarter, and grow steadily in the second half, as major accounts return and new business ramps. This has happened in other transitional quarters. Those of you that have followed the company before.

We were able to keep G&A flat, despite really extraordinary currency swings, and our continued significant investments in our SAS technology offerings. So we're managing our overhead expenses reasonably well. GAAP net income was a loss of $3.3 million or about $0.06 a share, expense restructuring. That's a decline year-on-year as I mentioned, related to the gross margin impact of that customer and segment mix.

Going further down the statement here, our tax expense remained low at about $500,000 for the quarter, and we continue to manage our FX-related other expense in line as well, which was only about $450,000 for the quarter, and that's really despite a 20% swing from peak to trough, among major currencies during the quarter. It's been a long time since we've had that amount of volatility, and I'm pleased that we were able to keep our exposure to such a small amount in that environment.

And finally, we ended the quarter with about $25 million in cash. And Q1 revenue came in as planned. We had some short term headwinds on gross margin, due to work mix, and we continue to manage our G&A, tax, and currency costs, despite volatility. And our balance sheet remains strong.

So now let me touch on our strengthening demand environment for Q2 and our view of the second half of 2011. As I mentioned, we're seeing positive trends on the revenue side. First, with new account growth, as we break down our sequential quarter revenue ramp for Q2, we're delighted to see growth coming from newer programs with clients outside of our traditional top 10.

This might be companies such as Cisco our Caterpillar, Eli Lilly, or Motorola. We won a number of these new programs in 2010 that are starting up in Q1 and are now ramping in Q2. And now, we're ramping these into what we'll consider major accounts, and this is what we tend to do well. We win the project, we prove ourselves on some smaller projects, and then we grow this relationship over time.

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