April 14, 2011 - 4:13pm EST by
2011 2012
Price: 3.55 EPS NM NA
Shares Out. (in M): 62 P/E NM NA
Market Cap (in $M): 219 P/FCF NM NA
Net Debt (in $M): -4 EBIT 11 0

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I am recommending a long position in Lionbridge Technologies (“LIOX”), which I believe presents a compelling risk/reward proposition at current trading levels. LIOX is a leading provider of language, development and testing solutions that enable clients to develop, release, manage and maintain their technology applications and content globally.  LIOX has been posted to VIC twice previously, first by engrm842 in July 2006 at $5.36 and then by mrsox977 in February 2008 at $3.05.  I will review the recent history, which provides some necessary context, followed by a description of the business and a discussion of the investment thesis.

As you may have gathered from the prices at which LIOX previously was recommended, the stock has basically gone nowhere for nearly 10 years.  Indeed, ten years ago LIOX traded around $3/share (then sporting a fancy multiple) and since then has traded as low as sub-$1 and as high as over $11.  A series of missteps coupled with some bad luck and poor timing has conspired against the Company, which no doubt has frustrated holders and analysts alike.  This history of disappointment likely has contributed to the severity of a roughly 30% selloff since early November that I believe has been overdone and presents an excellent entry point just as the Company is poised to accelerate earnings and cash flow growth.

LIOX was founded by its current CEO, Rory Cowan, and became an independent company upon its purchase from Stream International, then controlled by R.R. Donnelley, in 1996.   After a few acquisitions funded by debt and private equity, LIOX completed an IPO in 1999 whereupon Cowan set about consolidating the fragmented globalization and localization services markets.  This effort culminated with the transformative acquisition of Bowne Global Services (“BGS”) in late 2005, making LIOX the undisputed global leader in the industry.  Like many acquisitive companies, LIOX stumbled integrating the larger BGS.  Moreover, in hindsight, LIOX had likely failed to fully integrate the acquisitions that had preceded the BGS deal.  Nevertheless, LIOX ultimately did achieve substantial synergies from the BGS deal, but just as it was poised to reap the benefits, the great global recession ensued.  Inasmuch as a significant amount of LIOX’s revenue is tied to global new product rollouts, it was hit pretty hard in the recession, with revenues falling 14% between 2007 and 2009 while EBITDA dropped by over 30%, reflecting the operating leverage in the business.

LIOX responded to the difficult operating environment by aggressively reducing its cost structure.  In particular, the Company has shrunk both its workforce and operating locations, especially in Europe, a high cost location where restructurings tend to be drawn-out affairs.  All along, LIOX has invested in its core translation technology and database, which also has supported the substitution of capital for labor and a reduction in fixed costs.  This technology development is important to understanding the Company’s potential, and we will return to discuss it after a brief review of the business.

LIOX provides a full suite of language, testing and development solutions to businesses in diverse end markets including technology, mobile and telecommunications, internet and media, life sciences, government, manufacturing, automotive, retail and aerospace. LIOX's solutions include translation and localization; interpretation; language technology; technical authoring and eLearning; product engineering; application development and maintenance and testing; and global professional “crowdsourcing” (described below). The Company's services enable global organizations to increase market penetration and speed adoption of global content and products, enhance return on enterprise application investments, increase workforce productivity and reduce costs.  LIOX has three main operating segments (as summarized in its 10-K):

1.     Global Language and Content ("GLC")—71% of 2010 revenue: GLC solutions enable the translation, localization and worldwide multilingual release of clients' products, content and related technical support, training materials, and sales and marketing information. GLC solutions involve translating, localizing and adapting content and products to meet the language and cultural requirements of users throughout the world. As part of its GLC solutions, LIOX also develops eLearning content and technical documentation. LIOX GLC solutions are based on the Company's Software-as-a-Service ("SaaS")-based language technology platforms and applications, and its global service delivery model which make the translation and localization processes more efficient for LIOX clients and subscribers.  LIOX currently has two related SaaS offerings:  (a) its Translation Workspace platform is a multi-tenant translation productivity technology that helps translators, agencies and enterprises manage and sequence their language assets in real-time, collaborate among translators, monitor project productivity, and automate quality assurance within a private translation work environment; and (b) LIOX’s newest SaaS-based translation technology, dubbed “Geofluent”, which instantly translates content and communications into multiple languages.  js" type="text/javascript"> ; The Geofluent platform has been in beta testing with Intel, Cisco and Symantec and is the result of a partnership with IBM announced in 2010.  The platform includes an IBM-developed machine translation engine, applications program interfaces, i.e. software to facilitate integration into enterprise applications, and access to LIOX’s translation memory capability and vast translation database.  The Company recently announced the general availability of Geofluent so the focus going forward will be on selling it.

2.     Global Development and Testing ("GDT")—24% of revenue: Through its GDT solutions, LIOX develops, optimizes and maintains IT applications and performs testing to ensure the quality, interoperability, usability, relevance and performance of clients' software, search engines, consumer technology products, web sites, and content. LIOX has deep domain experience developing, testing and maintaining applications in a cost-efficient, blended on-site and offshore model. LIOX also provides specialized search relevance testing, keyword and global search optimization and related services for its clients' online marketing initiatives.  Essentially, GDT encompasses two different business models:  a traditional onshore/offshore, employee-intensive outsourcing business; and what the Company calls its “global crowdsourcing” business, which taps into thousands of part-time/contract employees worldwide (through the “cloud” of course) to provide specialized search relevance, online content editorial, keyword optimization and related services for search engine clients like Google and Microsoft’s Bing among others.

3.     Interpretation—5% of revenue: LIOX provides interpretation services for government, business and healthcare organizations that require experienced linguists to facilitate communication. LIOX provides interpretation communication services in more than 360 languages and dialects, including onsite interpretation, over-the-phone interpretation and interpreter testing, training, and assessment services.

Set forth below are summary historical financial data for LIOX for the five full years since the BGS acquisition.  Inasmuch as there are substantial non-cash and (supposedly) one-time charges that impact GAAP net income, I have also shown an “adjusted net income” that simply adds back non-cash items such as depreciation and amortization (which is elevated due to amortization of acquisition-related intangibles), goodwill impairment, and restructuring charges.  The Company has substantial federal and state NOLs but does pay tax in some foreign jurisdictions; for simplicity, I show the adjusted net income without any tax impact.














   % growth












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Net Income






Adj. Net Income
























Net Debt (Cash)






 The as-reported numbers certainly aren’t pretty and frankly are difficult to parse given all the moving pieces.  For example, revenues in 07/08 are inflated by a decline in the dollar while margins in those years are depressed by the same currency fluctuations because LIOX has more non-dollar costs than revenues.  In 2010, 66% of costs were non-dollar (mostly euro) while only 41% of revenues were non-dollar (also mostly euro).  In 2008, when the dollar declined 7.8% vs the euro, EBITDA took a $5 million hit.  More recently, the effect has reversed as a stronger dollar in 2009/10 has depressed revenues modestly while slightly improving margins. 

 LIOX closed 2009 at $2.30 but subsequently traded as high as $6 in Spring 2010 after announcing the IBM partnership (the words “IBM partnership”, “SaaS” and “cloud” are an elixir for small cap stocks).  We had owned the stock but took the occasion of the euphoric run-up to exit.  The stock drifted lower through Fall when LIOX reported a modestly disappointing Q3 that resulted in a 20% drop in the stock (ah, the curse of high expectations among the momentum crowd).  The relative weakness in LIOX’s second half was driven mostly by Microsoft, the Company’s largest customer accounting for ~ 20% of revenues.  Although LIOX grew its non-Microsoft revenue by about 7% in 2010, Microsoft had a lull in its product release schedule in the second half that drove a decline in Microsoft revenues.  This Microsoft weakness is expected to persist into the first half of 2011 before business ramps up again in the second half.  In addition, the market likely was looking for more contribution from the IBM deal and sooner.  We believe such expectations were never very realistic, but the IBM imprimatur does speak volumes about LIOX’s leadership position in the industry and the quality of its linguistic technology and database.  LIOX’s blue-chip customer base also validates its position:  the Company’s second largest customer is Google, which accounted for 11% of 2010 revenues, and LIOX generated over $2 million in revenues last year from each of Cisco, HP, Oracle, Caterpillar, Johnson & Johnson, Canon, Porsche, and the U.S. Department of Justice.

Set forth below is a summary of LIOX’s current valuation, which admittedly does not look particularly cheap on the surface.  However, consider that LIOX generated $98.3 million in cumulative operating cash flow (or nearly half its current market cap) in the past five years, a period of time that included the BGS consolidation, European restructuring, and a vicious recession all while the Company was spending to develop new offerings such as Translation Workspace and Geofluent. 




Shares Outstanding






Market Cap



Less:  Net Cash









A combination of noise in the numbers (currency, restructuring, amortization of intangibles, the ebbs and flows of Microsoft etc.) and the roller-coaster economic environment in recent years has obscured a few key developments for LIOX:  (1) migration of the business model from a personnel-based outsourced service provider to a blended model that also includes SaaS offerings; (2) substantial restructuring of the business to integrate it and reduce fixed costs, especially in Europe; and (3) the elimination of the Company’s net debt, which enhances financial flexibility and reduces balance sheet risk.  The benefits of #2/3 are pretty self-evident, but understanding #1 is critical to the upside thesis.

LIOX is at the early stages of effecting a multi-year transition from a highly people-intensive business to one with greater balance between people and technology.  Heretofore, LIOX utilized technology largely for internal purposes to facilitate its service offerings and increase productivity.  Today, LIOX has commercialized its technology platform and has commenced monetizing it.  For example, in 2010 LIOX attracted over 2200 translators as subscribers to its Translation Workspace platform and has commenced marketing it to enterprises and agencies as well.  Although the revenue impact of Translation Workspace subscriptions likely will be modest, it is highly incremental and also increases the appeal of LIOX to translators (obviously a key constituency for a group that can be transient).  Moreover, LIOX already has the largest database of language assets in one centralized, secure platform (three billion words and counting), and the more data it adds to the database, the more valuable it becomes.  Indeed, LIOX’s development of its database and the Translation Workspace platform no doubt facilitated the Geofluent partnership with IBM, which is still in its infancy.  In essence, Geofluent provides real-time translation, which is a very big deal for global enterprises.  Currently, a very small amount of only mission critical enterprise content and communications is translated because of the relatively high costs of manual translation.  At a substantially lower cost of translation and with “good enough” translation quality, the market for translation could be substantially larger, which is the business case for the partnership.  Geofluent has been in beta testing with Intel, Cisco and Symantec and is now ready for general availability.

LIOX’s transition will not occur overnight.  Indeed, the reported numbers for LIOX’s SaaS offerings in 2011 will be small (perhaps $5-10 million revenue run-rate leaving 2011); however, they have the potential to generate substantial future growth and to do so at extraordinarily attractive software-like margins on a recurring revenue/subscription model.  Such a revenue and income stream typically gets capitalized at much higher multiples than LIOX’s traditional translation service business.  Moreover, even without a large contribution from the SaaS offerings, LIOX’s reported financials should improve markedly as it winds down its restructuring program, the BGS intangibles amortization declines significantly, and it reaps the benefit in earnings and cash flow from revenue growth while its investments in the new SaaS offerings will be moderating.  We estimate that LIOX could generate over $35 million in EBITDA in three years without heroic revenue growth (7-8% annually, within management’s 2011 guidance of 5-10%) given the high flow-through of incremental revenues.  At multiples at which LIOX has previously traded, it could easily double in this timeframe while the upside case where LIOX’s SaaS offerings take off and the stock is re-rated could be even higher.  However, we believe the downside risk is comparatively low given the Company’s industry leadership position and associated blue-chip customer base, lack of leverage, liquidity, business momentum and improved cost structure.

In terms of accumulating LIOX, investors should take note of the stock’s volatility.  Indeed, when we first began acquiring the stock and turned to writing up the idea for VIC, it was trading around $3.30 and traded as low as $3.10 intraday in March.  This is not a stock to chase; be patient, and the odds are that you will find more attractive entry prices, especially given the expected temporary softness in the business in the first half of 2011 attributable to the lull in Microsoft’s product rollout schedule.


GAAP profitability, accelerating revenues and cash flow, traction from Geofluent SaaS rollout
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