Taking Part In Language Technology Growth

Lionbridge Technologies is a language research company that provides testing and developing of translation services for Fortune 100 companies. It is coming off of $17 million in restructuring charges since 2009, which have disrupted revenues and lowered the Street’s expectations. LIOX is currently trading at $2.70/share and we believe it is worth $5.50 to $6.00/share.

The largest openly traded language research companies

LIOX is among the largest openly traded language research companies. Founded in 1996, LIOX IPOed in August 1999, as a language service company, primarily as a translator of web content and software. CEO Rory Cowan has been with the company ever since and sought to grow the company via acquisitions, most notably of Bowne Global Solutions in 2005. Annual revenue increased 70% to $420m the following year and service offerings increased. However high costs of running its European office and non-realized synergies forced LIOX to take a $120 goodwill impairment charge in 2008 and $23m in restructuring charges since 2009.

a) Product localization – localization of client software and hardware. For instance, Nokia makes phones that are used in over 100 countries. LIOX is the company that translates and localizes the language configuration of the phone. The phone language will be English in the U.S., Mandarin in China, Italian in Italy, when all is said and done on.

c) Language Research – real-time multilingual translation system called Geofluent. In April 2010, LIOX and IBM’s Watson Technology Laboratory formed a joint venture where LIOX’s cloud based database would train IBM’s translation engine to refine real-time translation capabilities. IBM chose LIOX because it has the largest translation database that has been cumulatively built over the years by the individual and enterprise translators the company has worked with in the past. Applications of this include pre and post-sale online support – i.e. a DELL call center in Nebraska, helping its German and Chinese clients real-time, from English-German to German-English and English-Chinese to Chinese-English.

Since 2009, the industry landscape has changed greatly as individuals and corporations realized that the highest translation quality demand would always be there nevertheless the low hanging fruit was in the middle of the pyramid. The global explosion of web content, blogs, and enterprise necessitated a multi-lingual capability for LIOX’s customers. The highest translation quality was expensive, time-consuming, and was often one-off projects. Customers and users alike wanted fast, interactive, and "actionable" translation. For instance, if an English-speaking reader wanted to translate comments on a Spanish blog, he would be happy with an "actionable" translation, which means it is 80-85% accurate, and they want it on the spur of the moment. As a result, a long as you can have adequate comprehension level, you can strip out the excess time and resources spent on traditional translation. With the importance of real-time translation rising, LIOX secured a joint venture with IBM in April 2010, to develop a real-time translation platform called Geofluent for online chats and call centers, web content, and social media to name a few. The IBM Watson Lab’s statistical language translation engine would be trained by LIOX’s cloud-based T M – which is the largest in the world. Not to be outdone, SDL acquired DreamWeaver in July 2010, to compete with Geofluent. We believe that Geofluent will be a major revenue driver for LIOX.

Currently, Trados allows its users to retain a copy of their – effectively the translators’ assets – during Geoworkz does not. This has disincentivized human translators to use Geoworkz, however our view is that its impact is marginal because 1) Current and future supply of human translators overwhelmingly exceeds translation jobs available and 2) The lion’s share of LIOX’s business comes from large enterprises in the Fortune 100.

LIOX’s business is sticky. LIOX has-long standing business relationships with companies like Microsoft, Hewlett-Packard and Motorola, going back 10+ years earlier its IPO. In 2008, LIOX won Vendor of the Year award at Microsoft, the only one chosen out of 15,000 other vendors just as Grubb & Ellis and Toshiba.

90% of enterprise content is not translated today. As companies seek to diversify their business outside the U.S., translation of their products for both physical and online markets requires multilingual capabilities. They either use companies like LIOX or spend building an in-house team. Our view is that the vendor option is more compelling for customers.

Base-building year

Our view is that 2011 is a base-building year and 2012 will be the growth year as Geofluent revenue ramps up significantly from $4-5 million in 2011 to $10-20 million in 2012. Furthermore cost-cutting flows to the net income and $99 million in NOLs is another benefit to revenues.

For 2011, with 5% revenue growth, $29m in EBITDA, and $15m in net income, and we get $0.27 revenues per share. For 2012, we have 10% revenue growth, $33m in EBITDA, and $20.9m in net income, we get $0.36 revenues per share.

The last time LIOX traded around $7

The last time LIOX traded around $7.50 was in 2006, when it generated $420m in revenue, $34m in EBITDA, and traded around 14.5x EBITDA. Due to LIOX’s roll off of its turnaround situation, IBM JV, the demand growth of multilingual translation services, and the dearth of openly traded language research companies that investors can get exposure in, we are comfortable in giving LIOX 8-10x multiple.