LIONBRIDGE TECHNOLOGIES INC LIOX
January 21, 2016 - 11:18am EST by
cuyler1903
2016 2017
Price: 4.45 EPS 0 0
Shares Out. (in M): 65 P/E 0 0
Market Cap (in $M): 290 P/FCF 0 0
Net Debt (in $M): 63 EBIT 0 0
TEV ($): 353 TEV/EBIT 5.9 0

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  • Activism
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Description

Under-the-radar activist target of Carlyle's former Global Buyouts Vice Chairman and legendary Lee Cooperman, with insider buying and bloated SG&A, potentially worth 85-225% more in a sale to strategic or financial buyer.  The activists' appointed board member is a former Senior Managing Director of Blackstone's Private Equity Group.  

Based in Waltham, Massachusetts, Lionbridge Technologies Inc. (“Lionbridge” or the “Company”) provides language translation, online marketing, content management and application testing solutions that ensure brand consistency and local relevancy on a global basis.  The Company serves more than 800 customers via its technology platforms and global base of more than 100,000 contract translators.  Lionbridge’s customers include Microsoft, Google, Rolls-Royce, The Gap, HTC and John Deere.

As a uniquely-positioned provider of global translation services via a combination of a SaaS real-time translation platform and contracted translators, Lionbridge is able to win business from multi-national companies that demand precision in language translation for their global audiences and customer bases.  These customers cannot afford to publish inconsistent or even slightly inaccurate translation as would result from a purely automated solution – rather, they are willing to pay for Lionbridge’s translation platform and contracted staff to ensure consistency and accuracy of message worldwide.  (Full company description below.)

Founded in 1996 by CEO Rory Cowan, a graduate of Harvard Business School and a Trustee of the prestigious Deerfield Academy (Cowan is well-known in Massachusetts), Lionbridge should generate approximately $560 million of revenue and $50 million of EBITDA in 2015, and management believes EBITDA should grow approximately 20% to $60 million in 2016.  At the current share price of $4.45, Lionbridge has a market capitalization of $290 million and, after accounting for $63 million of net debt, a total enterprise value of $353 million.  As such, the Company’s implied valuation of 0.6x 2016 revenue and 5.9x 2016 EBITDA is very low, particularly given that the company spends 25% of sales on SG&A expenses.  The shares trade at only ~1.8x 2016 EV/gross profit, which I believe is the most relevant metric in this case, which is 4+ turns below other publicly traded BPO and consulting companies, and vastly below most SaaS companies.

The primary reason for the low valuation multiples, however, is that management has created no lasting shareholder value over the last 10+ years.  In fact, it has overseen the destruction of substantial shareholder value, as the stock traded over $8 in 2006 and over $10 in 2003.  The Company has completed a number of small, tuck-in acquisitions of questionable long-term value, and has demonstrated a pattern of failing to meet even short-term guidance and expectations.  Further, Lionbridge has some customer concentration with Microsoft and Google, though this is arguably mitigated by the fact that the Company interacts with numerous decision-makers regarding numerous programs within these organizations.

So why now?  Several reasons, and my investment thesis is grounded in the following points:

 

  • Shareholder Concentration: While founder and CEO Rory Cowan continues to own over 4 million shares, or 6.3% of the Company, he appears to have little ability to block activist plans.  In addition to the 7.1% stake held by Glen Capital and Cooperman, hedge fund Glenhill Capital (no affiliation with Greg Summe's Glen Capital) owns ~11% of the Company.  Given his age (mid-60s), and the poor share performance since inception, Cowan may ultimately be happy to sell the Company if the activists apply sufficient pressure.
  • CFO “Retirement”: After significantly missing previously issued Q3 earnings guidance, Lionbridge’s CFO announced his retirement on the November 9th call.  In this case, the Company chose not to go outside to recruit a new CFO, but to promote the VP of Finance to this role.  It is possible they view this as a less expensive, interim solution. 
  • Massive Potential Synergies to a Strategic Buyer: Lionbridge’s cost structure appears highly bloated, with $135 million of SG&A expense supporting only $540 million of sales, or 25% of sales spent on SG&A ex. depreciation.  As such, the Company is only able to convert its ~34% gross margin to a ~9% EBITDA margin.  In 2014, $80mm of SG&A was G&A expense.  The Company has historically had substantial stock comp and restructuring expenses, as well.  With Quella's appointment to the compensation committee, I expect these to be severely curtailed.  And with a renowned global customer base consisting of many Fortune 500 companies, I believe that Lionbridge would make a highly attractive, and highly accretive, acquisition target for the larger consulting and business process outsourcing companies who could cross-sell services and eliminate a significant amount of expense.  Such potential acquirers include Accenture, IBM, Cap Gemini, Cognizant and Infosys, among other numerous publicly and privately-held firms.  By comparison, these companies generate gross margins of 25-50% and EBITDA margins of 15-25%.  Accenture, for example, generates a 17% EBITDA margin on 32% gross margins, and trades for 1.9x revenue, 6.1x gross profit and 11.5x EBITDA.  While these are not pure-play comps, the data are directionally instructive.


In summary, at 3.0x to 5.0x gross profit, a reasonable discount to the larger consulting and BPO companies, Lionbridge’s implied share price would approximate $8.25 to $14.40 per share, or 85% to 225% higher than the current price.  Glen Capital has a large fund and personal stake here, and brings to bear enormous relevant expertise and connections from Carlyle, Goldman Sachs, Blackstone and Lee Cooperman, so I expect a high degree of attention and success in driving shareholder value.  Further, Lionbridge’s CEO should be well-incentivized to do the right thing by his 4 million share ownership stake.

Valuation Math:

 

$200mm -- 2016 LIOX Gross Profit
x 4.0x -- Represents a 2 turn discount to comparable BPO and consulting firm EV/GP valuations
= $800mm -- TEV
- $63mm -- Net Debt
= $737mm -- Equity Value
/ 65mm -- Sharecount
= $11.34 -- Midpoint of Estimated Potential Value Range

At 3.0-5.0x EV/2016 Gross Profit, implied value is $8.25 to $14.40.

Further, there is "Wildcard" upside potential from the company's just-announced broadening of its SaaS product GeoFluent real-time translation technology to include omni-channel customer care features for contact centers and business process outsourcers.  This technology could drive the valuation multiple for LIOX much higher.  (See below.)


--------


CEO Expectations for 2016 from November call, indicating ~$60mm of 2016 EBITDA:

Q:  Just with respect to the fiscal '16 guidance, I think you guys -- do you expect to grow 20% to 30% on the adjusted EBITDA line? Don't recall seeing guidance or updated guidance for the full year, so just curious what sort of base we should be working off is.

A:  Oh, full year base, you mean -- oh, full year base for 2016 EBITDA versus EBITDA versus 2015 EBITDA. So I think we're going to be in that adjusted model. We've never really given it, but it's sort of in that 50-ish, maybe a little bit higher than that for '15. And so if you think about a 20% lift on top of that, and that feels pretty comfortable and conservative at this time.


Lionbridge unveils GeoFluent real-time translation for omni-channel customer care:

 

GeoFluent, a SaaS offering from Lionbridge, eliminates language as a barrier between contact centers and consumers. By providing omni-lingual support across the omni-channel, brands improve CX, increase revenue and decrease cost and risk.  GeoFluent integrates with leading contact center communications platforms to maximize customers’ existing investments, enabling them to support 95% of the world’s GDP languages.  http://www.lionbridge.com/lionbridge-unveils-geofluent-real-time-translation-omni-channel-customer-care/ 

Company description from S&P:

 

Lionbridge Technologies, Inc., together with its subsidiaries, provides language, content, and testing solutions worldwide. The company operates in three segments: Global Language and Content (GLC), Global Enterprise Solutions (GES), and Interpretation. The GLC segment offers content translation services; global marketing solutions, including the creation, management, translation, and deployment of digital market content and campaigns in languages and technical platforms; and product localization services, such as creating foreign language versions of its clients’ products and software applications. It also provides language technology solutions for enterprises, freelance translators, and translation agencies on cloud base comprising Translation Workspace, a productivity technology for translators and agencies; and GeoFluent, a machine translation technology that translates content and communications into multiple languages on a real-time basis, as well as technical engineering and documentation services. The GES segment provides enterprise testing solutions consisting of enterprise-scale managed test teams, functional testing, multimedia testing, globalization testing, and application testing and application certification; and in-county testing solutions, such as application testing, search relevance testing, content validation, mobile device testing, and data entry services. The Interpretation segment offers telephonic, onsite, and simultaneous interpretation services that include interpreter recruitment, testing, quality assurance, and assessment services in approximately 360 languages to government agencies, businesses, and healthcare organizations. The company serves businesses in technology, Internet and media, manufacturing, mobile and telecommunications, life sciences, government, automotive, aerospace, and retail sectors. Lionbridge Technologies, Inc. was founded in 1996 and is headquartered in Waltham, Massachusetts.

Primary risks:

 

Poor execution by management
Significant reliance on leading customers Microsoft and Google
Reliance on activists
Macroeconomic environment
Technological risks

 

Disclaimer:  The author of this idea presently has a long position in securities of this issuer and may trade in and out of these positions without notice.  The data contained herein are prepared by the author from publicly available sources and the author's independent research and estimates.  No representation or warranty is made as to the accuracy of the data or opinions contained herein.  Please do your own research.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1)  Investor awareness.
2)  Significant cost reductions.
3)  Sale to a strategic or financial buyer.
4)  Improved management execution.

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