The Nasdaq’s spring slide continues.
Since hitting its 2014 high of 4,371 on March 6, the Index has shed 7%.
Given that volatility, the best strategy for technology investors is to invest in trends that are (dare I say it?) “too big to fail.” For example, Big Data, cloud services, on-demand services and mobile.
Well, here’s a company that’s involved in each of those areas.
But is it good enough to win your investment dollars?
There’s only one way to find out: Run it through my C.H.A.O.S. Strategy… which is the ultimate way to evaluate the merit of groundbreaking technologies and the companies behind them.
So let’s see if this one passes muster…
Can the Lion Beat C.H.A.O.S.?
Based in Waltham, Massachusetts, Lionbridge Technologies, Inc. (LIOX) uses its online, mobile and cloud technology platforms to provide business services to over 800 global companies in 26 countries.
Lionbridge can boost companies’ market shares by helping them sell their products and services, and forge better relationships with their customers. More specifically, it provides content management, marketing, language and dialect translation, interpretation, crowdsourcing, and training for governments and businesses in healthcare, media, telecom, retail and more.
It also provides performance and design testing under the VeriTest brand to ensure precision, user-friendliness and brand consistency for its clients’ products.
But today, I’m using my own testing service – C.H.A.O.S. – to see how Lionbridge stacks up from an investment angle. As it turns out, it scores extremely well…
In the first quarter, Lionbridge’s year-over-year revenue rose by 6% to $120 million. That meant the company’s gross profit margin swelled by nearly 300 basis points to 30.9%.
Amid that growth, Lionbridge was still able to contain its operating expenses, which have remained virtually the same over the last five quarters.
This boosted two other crucial fundamentals:
Operating Income (Earnings Before Interest and Tax, or EBIT): This hit $2.1 million for Q1 – up by $4 million from Q1 2013.
Net Income: This totaled $1.9 million ($0.03 per share) – up almost $5 million ($0.08 per share) from last year and significantly better than expectations.
This isn’t an anomaly, either.
Lionbridge consistently grows its sales and earnings. And it’s beaten consensus estimates in 10 of the last 12 reports.
Future projections are upbeat, too. Management reiterated its second-quarter revenue guidance (between $129 million and $133 million) and said fiscal 2014 revenue growth will be 5% to 10% higher, with a gross margin bump of 50 basis points.
After seeing the company’s boost in EBIT, I ran Lionbridge through an EBIT valuation model. After normalizing its revenue streams and operating margins from the last five years, and accounting for its debt, expenses and outstanding shares, the stock is substantially undervalued at current levels and trading for around half of its fair value.
C.H.A.O.S. Meter: 19/20
When Lionbridge was founded in 1996, the internet was just gaining traction and allowing businesses to dramatically expand.
That worked well for Lionbridge, as it began as a language service provider, focusing primarily on translating web content.
You see, technology companies initially developed products for their home markets and then created foreign language versions that were compatible with local operating systems and standards.
However, the lack of enterprise-wide standardization across hardware, software and telecommunications infrastructures created complexity in developing local versions. And that often resulted in six- to 12-month delays of new product launches.
Enter, Lionbridge. Its standardized, all-encompassing technology hit the enterprise market with high impact. And as technology has evolved, Lionbridge is disrupting the enterprise market again today.
It’s doing so through its “Crowd-in-the-Cloud” technology and “onDemand” crowdsourcing model.
It helps companies establish outsourced contract work from its “cloud crowd” of around 150,000 workers in more than 100 countries. And through its encrypted cloud platform, Lionbridge supplies a virtual workforce that simplifies workflow and makes it more efficient.
This form of “managed crowdsourcing” is disrupting the traditional outsourcing business model by offering…
- Unparalleled Productivity: With thousands of employees working in different time zones, Lionbridge can literally deliver results around the clock.
- Infinite Flexibility: Since Lionbridge boasts a 24/7 global workforce, it gives companies the flexibility to scale projects up or down whenever they choose.
- Cost Savings: The model essentially allows companies to “pay as they go” for project work, instead of hiring full-time, salaried employees and paying for benefits. End result: Lionbridge offers companies more employees at a 30% lower cost.
The technology itself isn’t that new. But the results of Lionbridge’s technology and its innovative combination of outsourcing and crowdsourcing is disrupting an otherwise stagnant market. It’s growing revenue, enhancing brand loyalty and increasing efficiency for Fortune 100 companies.
C.H.A.O.S. Meter: 18/20
Over the past year, the company’s sound restructuring plan has ignited a 95% share price spike (and up 168% at one point).
That plan has focused on lowering operating costs, increasing revenue and margins, a share buyback program, and acquiring new revenue by expanding its business segments and securing new contracts.
For example, in mid-February, Lionbridge announced three new crowdsourcing deals. Details are undisclosed, but Lionbridge expects the contracts to generate $3 million in revenue for 2014.
With over 800 clients globally, the three new deals further validate Lionbridge’s superiority in the sector.
In addition, the company is currently in the midst of a three-year, $18-million share buyback program where it will repurchase $6-million worth of its shares per year.
Lionbridge didn’t repurchase shares during the first quarter of this year, but I expect the company will repeat the trend from 2013, when its buybacks increased during the second and third quarters. That’s because its cash flow typically peaks between April and September – and we’re in that window now.
That should increase investors’ ownership value and fuel the share price.
Speaking of the shares, analysts are starting to take notice, too, with recent upgrades and “Buy” ratings issued on the stock.
In total, the analysts covering Lionbridge have a target price of $6.50 on the low end, and $9 at the high point.
Expect more upgrades to come – and when they do, shares will accelerate.
C.H.A.O.S. Meter: 17/20
Lionbridge benefits from long-term, recurring relationships with its large clients. In 2013, 87% of the company’s total revenue came from clients that utilized Lionbridge’s services for 12 consecutive quarters or longer.
In each of the industries that it serves, Lionbridge makes its money from three revenue areas…
~Global Language and Content Services (GLC): This accounted for 66% of total 2013 revenue. At $321 million, it was up 2% over 2012. Gross margins from GLC services hit just over 30%.
GLC services includes GeoFluent Technology. GeoFluent breaks the language barrier with the industry’s only cloud-based, real-time translation platform, which instantly translates content into multiple languages.
In Q1 2014, Lionbridge’s GLC revenue rose by 12% over Q1 2013, to $81.4 million. This year, the company projects 6% to 7% revenue growth.
That takes 2013’s revenue, and ups it to $343.5 million, which will be the central growth driver for Lionbridge this year.
Lionbridge’s GLC customers include: General Motors (GE), Volvo (VOLVY), Honeywell (HON), Nikon (NINOY), Cisco (CSCO), Expedia (EXPE), Hilton (HLT), Phillips (PSX), Whirlpool (WHR), and Black and Decker (SWK).
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But there’s a note of caution here: Given the international sales, the revenue is vulnerable to currency fluctuations.
~Global Enterprise Solutions (GES): At $145.8 million, this accounted for 30% of 2013 revenue – and was 22.5% higher than in 2012. And Lionbridge converted 29% of it into operating income.
This area includes Lionbridge’s “Testing” services, which provides quality control for its clients’ products. And when Lionbridge’s clients launch new products in new locations, its global team of local, “in-market” testers help those products gain familiarity among consumers.
Lionbridge’s GES revenue does experience periods of high growth, then drops after projects are completed.
In fact, Lionbridge’s Q1 2014 GES revenue fell by 6% year over year, as project volume declined. For the remainder of 2014, management expects GES revenue to remain flat.
~Interpretation Services: This segment pulled in $22.4 million, accounting for 4% of total 2013 revenue. It was down 4.4% from 2012, yet still produced 14.8% gross margins.
This area is slightly more niche than the others. It supplies experienced linguists who provide language communication services for federal and local governments, financial institutions, healthcare, and many others who need to breach language barriers. When clients want a Lionbridge linguist in a meeting, in court, the emergency room, or in the White House, they’ll be there.
Management expects this segment to remain flat this year.
In total, around one-third of Lionbridge’s orders are denominated in non-dollar currencies, mostly euros. That does present some vulnerability, but it can also work in the company’s favor, too.
And when you factor in a big chunk of seasonal orders – typically between $4.5 million and $11 million – they offset currency fluctuations.
But perhaps Lionbridge’s biggest revenue stream will come from an area that it’s currently scaling into…
C.H.A.O.S. Meter: 17/20
Lionbridge’s biggest growth driver is its Crowdsourcing-in-the-Cloud, onDemand service offering.
This recent addition to the company’s product lineup means all its services can be crowdsourced, and offered to customers more cheaply.
The opening quarter of 2014 was the first time that Lionbridge offered its onDemand service. And it’s attracted an impressive 198 clients – 35 of which are repeat customers, and 15 of which are Fortune 500 companies.
Based on that strong response, management projects $8 million to $10 million in additional revenue from onDemand, which will continue to rise in 2015.
C.H.A.O.S. Meter: 17/20
Final Verdict: Because of its secure cloud-based platform and innovative crowdsourcing business model used by governments and massive corporations across the world, Lionbridge notches an 88 on the C.H.A.O.S Meter.
And since we just had an 85 with Immersion (IMMR) last week, you know what to do: Invest now while the stock offers incredible value.
And it’s not just me dishing out high ratings. In April, Forbes named Lionbridge as one of “America’s 100 Most Trustworthy Companies,” issuing it a score of 91 out of 100. The honor is given to “companies that have consistently demonstrated transparent and conservative accounting practices and solid corporate governance and management.”
This time last year, Lionbridge shares traded for just $2.60. Since then, they’ve soared to $5.60, based on sound restructuring and robust sales and earnings. Yet some of its peers have enjoyed even bigger advances (on worse metrics, too).
That’s a good thing. With the Nasdaq’s current woes, we don’t want to get involved with over-inflated companies.
We want gems like Lionbridge that are still undervalued.
In the short term, I project Lionbridge shares to rise to their current intrinsic value of $6.72 – a 23% upside.
If it can match or beat future revenue targets and continue to grow its pre-interest and tax earnings, it could ultimately run north of $10 on the conservative side.
Your eyes in the Pipeline,