Lionbridge Technologies ( LIOX)

Q2 2011 Earnings Call

August 2, 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

George Sutton - Craig Hallum

Kevin Liu - B. Riley

Vincent Colicchio – Noble Financial

Presentation

Operator

Welcome, and thank you for standing by. [Operator Instructions.] I would now like to turn today's meeting over to Sara Buda, vice president of investor relations. Thank you. You may begin.

Sara Buda – VP, IR

Thank you. Welcome to the Lionbridge investor call to discuss financial results for the second 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.

Before I turn the call over to Rory, we should mention that Don Muir, our CFO, is dialing in remotely today as he's recovering from a knee injury. So now I'll turn the call over to Lionbridge Chairman and CEO Rory Cowan, and then we'll hear from Don.

Rory Cowan – Chairman, President and CEO

Thanks Sara, and welcome everybody, and welcome to Don. He has a knee brace that doesn't allow him to travel, so if during Q&A there's a little momentary lapse while we queue him in, please just be patient.

So today I'll walk through our second quarter results and the positive trends driving our business. Then Don will walk through our financials in detail. Let me start by summarizing the highlights for the quarter.

As you see, we delivered about $113 million this quarter, well ahead of our expectations, and this marks about 14% sequential quarterly growth. I'll comment on where the growth is coming from shortly, but we're delighted to see the strong demand from new clients that we had closed earlier. And as you know, it's about that nine month close-to-scale model that we have here.

And as we indicated at the last call, our existing top accounts are beginning to rebound a little earlier than we had expected. Total company gross margin was about 30.4%, reflecting the ongoing improvement from last quarter and again slightly ahead of, I think, the framework that we had shared.

With the growing revenue volume and benefits, our cost management is beginning to see some strong conversions of incremental revenue to opening profit compared to Q1. In fact, we saw about a 40% conversion of incremental revenue to operating profit on a sequential basis, and that's of course before our diminishing restructuring. So all the cost actions of the past 2 years are beginning to bear fruit, and now we're beginning to see the leverage from incremental revenue.

Comparing Q2 to last year, revenue was up about 8% year over year. Again, very positive. The operating profit conversion year-on-year was masked by a negative currency effect and the shift in work mix as we ran up new accounts.

We don't really have a fully GAAP auditable all the way through the statement currency macro, but our FP&A group does some currency activity, and this quarter in what looks to be constant currency, and that's latis, and yen, and euro, and all sorts of things. Actually, had very, very strong conversions compared to last year in a constant currency model.

On the net income basis, we reported about $0.03 GAAP and about a $0.04 ex-restructuring. So you'll begin to see even our restructuring is tailing off now.

Balance sheet remains strong as well, with ending cash balance of about $20 million, despite our strong sequential growth, restructuring, and our investments in the technology products business. So clearly it was a positive second quarter.

Let's talk about the demand environment that's leading to our strong momentum. We have emerged from these 3 quarters of revenue flatness that we had forecasted and are returning to growth, and I'm encouraged by this momentum for really several reasons.

The first one is I think we're just seeing better sales execution at all of our segments. Our GLC language business is starting to benefit from a stronger sales management and large accounts that are returning such as Microsoft and Nokia after a difficult start to the year.

Our GDT - and that's our development and testing business that shares a lot of infrastructure with the language business - is also showing strong growth year-on-year and sequential quarter thanks to the growth of the core testing business from accounts such as HP. And we're also seeing ongoing demand from large search clients in our GSS crowdsourcing business. So on all fronts better sales execution is driving positive momentum.

Second, we are ramping our recent wins. New clients are growing nicely into top 10 or 20 accounts and there's potential for further acceleration as the year unfolds and as we look into '12. We told you about some of these wins a few quarters ago, and sort of right on schedule they're beginning to ramp.

These clients are on a path to become part of our strong recurring revenue base, and this is what we really do well. We start with one program in one division and then grow steadily over time. Or, as one of our new sales leaders has nicknamed it, the "land and expand" strategy within large enterprises. So as I said earlier, it's about 9 months from close to scale, so this is working as it should.

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