Why Isn’t Lionbridge King of the Globalization Jungle?
Being the leader of the pride, it seems, doesn’t guarantee you a nice meal everyday. Waltham, MA-based Lionbridge Technologies (NASDAQ: LIOX) may be the world’s largest provider of localization services, helping hundreds of other companies from Microsoft to Merrill Lynch to Pfizer go global by translating their websites, product manuals, software programs, and drug warnings into other languages. But it sure isn’t getting rich doing it: On May 6 the company reported a net loss of $4.4 million for the first quarter—its third straight quarterly loss—and last Friday Lionbridge stock dipped to $2.37 per share, its lowest point in more than five years, and down 61 percent compared to a year ago.
That’s lower than even the most pessimistic analysts were predicting at the beginning of 2008. As the financial website 24/7 Wall Street put it in a catty post recently, “It looks like the lion’s roar is a meow, at best.”
It’s a frustrating reversal for a company whose CEO, Rory Cowan, was being lionized (that’s the last cat pun, I promise) just three years ago for putting together a $180 million deal to buy one of its main competitors, the Global Solutions unit of New York-based Bowne & Company. That acquisition vaulted Lionbridge into the ranks of Boston’s 60 largest companies. And it’s a puzzling state of affairs, given that the company’s revenues are large and growing—a record $117 million in the first quarter, up more than 8 percent from a year earlier. But no matter how high the company’s revenues go, its expenses seem to go higher.
One answer to the puzzle seems to be that Lionbridge’s expansion has put it at the mercy of the same twin forces—technology and globalization—that drive demand for its services.
Analysts who follow localization services—a $12 billion industry in 2007—point out that translation is still a labor-intensive process, and that Lionbridge’s strategy of employing hundreds of managers, engineers, and translators in expensive regions like Europe may be backfiring with the weakness of the U.S. dollar against the Euro and many other currencies.
And while Lionbridge has made a significant investment in technology—especially on work-flow automation and memory systems that save labor by identifying material that’s already been translated—it hasn’t really profited from that spending. “What has happened is that the benefits of the efficiency gain that Lionbridge has been able to produce through the use of technology have been handed right to the client” in the form of prices that have stayed flat despite global inflation, says Ben Sargent, content globalization strategist at Common Sense Advisory, a localization market research firm in Lowell, MA.
It wasn’t supposed to be this way. Lionbridge, founded in 1996, has spent hundreds of millions of dollars on acquisitions and other growth strategies, and has the client list (Bayer, Cisco, DuPont, GE, Google, IBM, Merck, Merrill Lynch, Microsoft, Morgan Stanley, Nokia, Pfizer, Sony, and Wal-Mart are a few of the big names) and revenues ($452 million in 2007) to show for it. With 4,600 employees in 45 offices around the world and a network of 25,000 freelance translators skilled in more than 200 languages, the company is three times the size of its closest competitor in the localization business. It has about 225 employees in the Boston area, split between its world headquarters in Waltham and its operations center in Framingham.
And in an interview last week, Kathleen Bostick, Lionbridge’s vice president of global services, detailed the company’s technology investments, which are intended to speed big translation projects. The biggest component is a “translation memory” system called Logoport, which matches up texts needing translation—say, a manual for a digital camera—with similar texts that have already been translated—for example, a manual for an older camera from the same manufacturer. “When you’ve got an update coming, you run it through the translation memory, and it will calculate how many new words there are, how many fuzzy matches, and how much material has already been translated, which saves a tremendous amount of time,” says Bostick.
Logoport, together with the specialized glossaries Lionbridge has compiled for translation projects in various industries, is part of a larger platform called Freeway that, according to Bostick, is the industry’s only Web-accessible translation services platform. While translation memory and computerized glossaries are common tools in the localization business, Freeway is the only translation system that allows thousands of freelance translators to log on simultaneously from their homes or wherever they happen to be located. Clients can access the system too, uploading projects for translation directly from their own content management systems.
“Nobody else has an online solution,” says Bostick. “We just put our one billionth word through Logoport.”
Lionbridge needs all that automation to deal with booming demand for localization services. Maturing economies in the Far East, for example, continue to attract Western companies like McKinsey & Company, which recently hired Lionbridge to create a Chinese version of its website. And increasingly, localization goes both ways: UFIDA, China’s largest software company, engaged Lionbridge’s Beijing office last year to create an English-language version of its enterprise resource planning software.
So, with businesses everywhere needing help expanding into global markets, and with so much manpower at its disposal, why is Lionbridge having so much trouble making money?
“It’s not revenues that are the issues at Lionbridge as much as margins,” says Sargent, whose firm does market research on companies in localization, translation, and outsourcing management. (Sargent himself was director of marketing communications at Lionbridge from 2001 to 2005.) “Their gross margins stink, and they’ve never been able to fix the problem.”
There are a number of theories about why Lionbridge’s margins lag behind those of competitors such as New York-based Translations.com and Maidenhead, UK-based SDL International. One is that the company leases too much expensive office space in cities around the world—and in fact, a recent cost-cutting campaign has led to office closures in New York and Germany.
Lionbridge’s net income is also being hammered by the U.S. dollar’s slide against the Euro and other foreign currencies, which makes it more expensive to employ people abroad. “The companies that are being hit the hardest are the companies that are Europe-based but selling in the U.S, because all of their costs are in Euros but their sales are in dollars,” says Sargent. “Lionbridge is a little better hedged than its European competitors in that respect. But they still have too much of their operation in Europe and too much of their sales in the U.S. What they should probably be doing now is selling more in Europe and producing more in the U.S.”
Another way to increase margins, obviously, would be to raise prices. But there, too, Lionbridge is constrained. Thanks largely to the efficiency gains brought by Logoport and Freeway, Lionbridge has been able to keep prices roughly flat—and in line with those of its competitors—for more than two decades. That’s great for customers; taking inflation into account, they’re actually paying about 40 percent less per word than they were in the 1980s. Unfortunately, the technology isn’t helping the firm build any margin.
That may be because there are still hidden costs to getting clients’ content onto Freeway, where employees and freelancers can get at it. “Every time they get a new project, they have to ask whether it’s worth ramping it into Logoport, or whether they should just do it on the side, since there is a cost associated with bringing it in,” says Sargent. “And some clients don’t want their stuff in Freeway. So many small projects are just run on an ad hoc basis.”
But Sargent doesn’t necessarily think the solution is to use Freeway for all projects. The company can probably save more money by reducing its internal head count, starting with its expensive European talent, he says. Alternatively, it could shift more of its operation to Asia, where labor is still cheaper.
“Part of the reason to have a globalized company like Lionbridge is so that you can use things like differences in labor costs and currency values to your advantage,” says Sargent. “If they can continue to grow their revenue and have a greater and greater share of their employees based in China and India, it may be that the size of the problem in Europe will become less and less every quarter.”
Cowan said in early May that he expects Lionbridge’s financial picture to turn brighter later this year, assuming that revenues from established customers continue to increase, cost-reduction actions take effect, and economists’ forecasts for a strengthening U.S. dollar are correct. So far, the market isn’t buying it. Despite the company’s attempts to prop up share prices by buying back small increments of its own stock, it’s been on a fairly constant downslide since late March. The only patch of good news, as market analyst Zacks Investment Research put it after Lionbridge’s last quarterly earnings report, may be that “there is not much downside left” to the company’s stock price.
By all rights, the companies that are making it possible for other corporations around the world to expand into one another’s markets should be able to earn a little profit in the process. But at Lionbridge, it seems that something’s being lost in translation.