We used to complain that the financial press didn’t pay enough attention to the globalization industry, but some companies now feel that they are getting too much. This trend will continue, as the LISA meeting in San Jose brought out writers from the San Jose Mercury News, Industry Standard, Red Herring, and Global Business who will now be covering the globalization industry.

Not long ago, Lernout & Hauspie Speech Products NV was widely regarded as one of Europe’s high-tech stars and one of the first to get wide-scale coverage in this industry. As the first Belgian company to list its shares on the Nasdaq market in the US, L&H garnered high praise from many analysts and journalists alike, which certainly didn’t hurt the stellar rise of its stock price to $72.50 last March. For example, as recently as August a technology fund manager interviewed by Multex.com’s The Internet Analyst News (August 6) considered the company’s shares “seriously undervalued” when they were being traded at $33 per share. According to him, “It is probably more important to own the stock now than to guess when the big rally will begin.”

How quickly things change. On November 9 L&H stock plunged to $3.525 on the pan-European Easdaq exchange, and to $6-7/32 on the Nasdaq stock exchange, just before trading of the stock was suspended indefinitely by both organizations. So far, more than $9 billion (or about 95 percent) of its market value has gone up in smoke. The company also warned that revenues for the third quarter ended September 30 would be at least $40 million below its previous forecast of revenues of between $165 and $185 million. According to industry analyst Cheryl Veit, “Writers and analysts are quite unhappy about this one.”

Amidst a major controversy regarding accounting and business practices, co-founders Jo Lernout and Pol Hauspie, have announced their resignation from their posts as executive co-chairmen, but will keep their seats on L&H’s board. Currently the Belgian speech recognition software company is under investigation by the Securities and Exchange Commission for a number of issues, including questionable accounting practices, a sudden surge in revenues in South Korea, and its ties to 30 start-up companies registered in Belgium and Singapore that accounted for a quarter of its revenue last year.

The company plans to restate its financial statements for 1998, 1999 and the first half of 2000 to make up for past accounting “errors and irregularities.” KPMG LLP, L&H’s regular auditor, approved both the 1998 and 1999 financial statements. The Wall Street Journal has recently revealed that the KPMG partner who was in charge of auditing L&H for many years had joined an L&H affiliate last year, raising a question about a possible conflict of interest (“Companies: Lernout & Hauspie unit hired parent firm’s KPMG auditor—Behet’s career path could spark questions about conflicts of interest” November 13, 2000). The results of both an audit by L&H’s internal audit committee and an audit conducted by KPMG are expected to be released in mid-December.

Microsoft Corp., which owns 7% of L&H as a result of a $45 million deal in September 1997, stated that it plans to continue working with L&H. But most of L&H shares are not in the hands of large firms, but rather are held by individuals. Hundreds of private shareholders in Belgium, represented by Deminor, a Brussels-based shareholder consultancy, plan legal action against the company. Together they own about 1.6 million shares, or about 1% of L&H’s stock. L&H already faces at least a dozen shareholder class action lawsuits in the US alleging that the company misrepresented its financial situation. Also under consideration are claims against L&H directors as well as against KPMG.

The L&H scandal broke in July, when articles in Forbes (“Something lost in translation” July 24, 2000) and the Wall Street Journal (“Lernout shares fall amid disclosure” July 6, 2000) questioned the company’s accounting and disclosure policies. The WSJ authors noted that nearly all of its revenue growth in recent quarters came from Korea and Singapore.

In an aggressive move to quell the crisis, L&H has called in a former White House lawyer, Lanny Davis, who reached near-celebrity status when he began defending the Clintons from charges of illegal fundraising in 1996. His strategy is to encourage firms to break bad news themselves, but to “pad” it with optimistic pitches. For instance, in August when L&H’s former CEO Gaston Bastiaens stepped down and was replaced by John Duerden, Davis managed to focus media attention on the positive aspect of the changeover. According to Forbes, “Davis spun the story as Lernout needing Duerden’s steady hand not to quell the scandal, but to manage explosive growth, given the new chief’s experience as co-president of Reebok and as an executive at Xerox.” (“Scandal Buster Lanny Davis defended President Clinton. Now he shows companies how to spin a financial crisis. Are they ready for his confessional approach?” November 27, 2000).

Will this strategy work? As for the future of L&H, it is still too soon to tell one way or the other. But David Futrelle, in a recent article appearing on the Tech Investor website probably gives an accurate reflection of current investor sentiment when he says, “It’s certainly possible that the stock will recover, but with so much uncertainty, and so much bad blood, surrounding the company, investing in it is akin to gambling. And if you’re planning to gamble, at least do it in Vegas, where the lights are bright and the shrimp cocktails are free.”

Until now, the globalization industry has not come under particularly intense scrutiny, partly because many of the technologies are still too primitive and unknown to merit significant attention. The L&H fiasco has been a wakeup call to industry analysts, who are only now starting to look at this industry with increasing interest. Indeed, this event could prove pivotal in the relationship between analysts and the industry, in that it will take on a new level of seriousness. It used to be that globalization firms could take cover while other tech firms came under heavy fire. Thanks to the L&H scandal, these days are gone.

On the brighter side, Bowne (BNE) announced that its third quarter results were in line with estimates from analysts polled by First Call/Thomson Financial. Net sales increased 11%, from $240,350,000 in the third quarter of 1999 to $266,080,000 for the quarter ended September 30, 1999. Robert M. Johnson, chairman and CEO stated, “While we are satisfied with our overall results in what proved to be a difficult market for financial print, we are extremely pleased with the results of both our Outsourcing and Globalization segments.” He reported that Bowne Global Solutions (BGS) posted record quarterly revenues and produced positive EBITDA (Earnings before interest, tax, depreciation and amortization) results, continuing its upward trend. BGS’s content business (CBU), received new sales orders including significant projects from MSN Search and DigitalThink.

But for fourth quarter 2000 things don’t look quite as rosy. Bowne expects to report fourth quarter earnings between 10 and 18 cents per share, below the 21 cents currently estimated by analysts. Shares of Bowne closed at $8.31 on November 10, off from its high of $14.37 in March. Bowne has created a separate Internet consulting subsidiary, Immersant, which doesn’t sound all that different from companies like Global Sight and Idiom.

The downward slide of Alpnet’s stock (AILP) has continued without interruption since the last “Money Talks” report, On November 9, Alpnet shares reached a 12-month low at 75 cents a share. It was also reported that the company’s president and chief executive, Jaap van der Meer, sold about 150,000 Alpnet shares to meet obligations under a margin lending arrangement.

Sales of services for the third quarter of 2000 were $13.2 million, with a net loss of ($687,000) or ($0.023) per share, compared to sales of services of $14.1 million and net income of $513,000 or $.019 per share for the third quarter of 1999. This decrease is attributed to two factors. The first is the impact of unfavorable foreign exchange rates, particularly in Europe, where about 55% of sales are generated. The second is the expenditure the company has incurred in connection with the implementation of its new business model. The company has also capitalized most of the costs of the development of ALPNETXchange™, its enterprise-wide resource management and workflow system to be launched in the fourth quarter of 2000.

Lionbridge (LIOX) stock is up slightly from our last report, to $8.37 (November 10), for a market value of nearly $230 million. Despite the continued decline of the euro, results for the third quarter of 2000 were very upbeat, with a record revenue of $30.3 million, up 29% on the $23.6 million generated in the third quarter of last year. This translates into a net loss for the quarter ended September 30, 2000 of ($2.8) million, or ($0.10) per share, as opposed to a net loss of ($9.6) million or ($0.73) per share for the third quarter of 1999.

On the business side, on November 13 Lionbridge announced a strategic alliance with Ask Jeeves, Inc., a leading provider of question answering technologies and services. Under the terms of the agreement, Lionbridge will enable Ask Jeeves to implement its business solutions in the multiple languages and formats of its global customers. The companies also plan to engage in joint sales and marketing activities to promote and deploy the solutions.

On November 6, Lionbridge announced it had expanded its multi-year, multi-million dollar contract with the Personal Services & Devices Group (PSDG) of Microsoft Corp. to include localization services for MSN content and web applications, as well as a range of Microsoft mobile, hardware, and gaming products. Lionbridge has also recently been selected as one of the preferred globalization partners for the PSDG division.

Berlitz GlobalNET (BTZ) has made headlines on several fronts during the past several months. The company has been on shopping spree lately, first with the acquisition of Ordhuset AB of Stockholm, Sweden, which gives Berlitz GlobalNET a strategic presence in the corporate capital of the Nordic Region. The terms of the acquisition are not available. Just days before, the company had acquired Paris, France-based Trad’Style Communication (TSC). TSC and its 47 employees will be merged into Berlitz GlobalNET’s existing Paris operations by the end of this year.

Another coup for Berlitz GlobalNET was the announcement of a two-year, million dollar agreement to provide translation support to Deerfield, Illinois-based Dade Behring Inc., one of the world’s largest clinical diagnostics companies. The agreement was established to help Dade Behring ensure its compliance with the European Directive for in-vitro diagnostics (IVD), which stipulates that IVD labeling must be available in the required languages of the EU member states in which IVDs are sold.

Finally, Berlitz GlobalNET has announced the opening of the world’s largest independent localization facility located in Dublin, Ireland. The 37,000-square-foot facility will house all of the company’s 350 localization and linguistic experts, and signifies Berlitz GlobalNET’s continued investment in Ireland as a key strategy for serving international customers. Despite these advances, Berlitz’s stock price traded in the $6-7 range, well below its high of $20.25 in March.

A new player entered into the localization game within the last couple of months one of the first reverse IPO companies we have come across. Logisoft (LGST) reported that third quarter revenue increased 44% on the previous year’s third quarter, to $1.8 million. Revenues from Internet services increased nearly 200% from the third quarter of 1999 and nearly doubled from the second quarter of 2000. Management attributed this growth to the increasing size of strategic Internet services engagements as well as to development of the Company’s roster of top-tier clients. These include Kodak, Sentry Group, NexPress, Fellowes, Element K (Ziff Davis) and Saatchi & Saatchi.

For the third quarter, the company reported a net loss of ($846,228) or ($0.03) per share and cash used in operations, which excludes non-cash expenses, of $693,721, both of which are generally in line with the company’s operating plan. Logisoft’s stock is currently trading at $0.62, representing a steady decline from its high in the $6-7 range in March.

In March 2000 Logisoft received its first round of financing, $6 million, from a group of private investors led by Avenel Financial Group. The funding was completed through a so-called “reverse IPO” which provided Logisoft with publicly traded stock to use in expanding its business and attracting and retaining top talent. Also noteworthy is the November 8 appointment of Founder and President Rob Lamy to the position of chief executive officer. He succeeds Dave Wilkerson, who had held the job since just last June.

Back on the European front, SDL International recently announced its results for the six months to 30th June 2000. Operating profits before depreciation and goodwill (EBITDA) were £691,000, an increase of 146% over the same period last year. Chairman and chief executive Mark Lancaster said he expects sustained revenue growth in the latter part of the year. The company’s stock traded at 353 pence per share on November 14.

Major announcements include the signing of an agreement with Saba (Nasdaq: SABA), a leading provider of e-learning infrastructure. Saba is using SDL’s WebFlow™ software product to maintain its multilingual Web site, creating an international Web presence in multiple languages, including German, French and Spanish. SDL also said that it has signed a multi-million dollar contract with Microsoft for the globalization of a number of its games software titles. The company said that the contract will run at least to September 2001, but specific financial details weren’t disclosed.

Logos, the ever-growing Italian localization firm, announced that it has acquired control of Muiderkring BV, a Dutch translation company specializing in Southeast Asian languages, and now holds 80% of the capital. This acquisition comes after the recent purchases of Polyglot NV, a Belgian company of which Logos currently holds 51% of the capital; Polyglot France, with a holding of 67%; and Bitez S.l., a Spanish company with a holding of 60%.

The company also announced that it has acquired a 51% interest in Guaraldi Editore of Rimini, a publisher of fiction and nonfiction which it sells both through conventional channels and online. As part of the acquisition agreement, Guaraldi’s material will also be accessible via Logos’ new online literature portal. The acquisition of Guaraldi heralds the transformation of Logos’ current electronic library, which carries 16,000 downloadable, free works in 113 languages, into a major multilingual literature portal. Logos also is planning to list on the Milan stock exchange early next year and pursue a market expected to be worth nearly $20 billion a year by 2004.

The other Logos—the company with one of the best machine translation technologies—basically “disinvested”. According to one of its former employees, its German shareholders finally lost patience and shut down most of its operations. Logos turned down an offer to be acquired by Lernout and Hauspie in 1997, thinking that the offer was undervalued.

Trados, however, made the transition from being only a technology provider to one that provides a process for multilingual documentation, and accordingly continues to receive new capital. This September it received $4 million from Hypovereinsbank’s Ad Astar venture capital unit. And Trados is one of a growing number of companies that are leading a trend by highlighting who its investors are.

One new German company has just come to our attention: Global Words. You can call 24 hours a day and get an interpreter immediately. The charge is EUR 2.5 per minute. They have been in business about a year and started out with EUR 1.7 million, mostly from Frankfurter Venture Capitalisten IVC. According to corporate management, they soon hope to reach EUR 2 million in annual sales. They also offer typical translation services, have 38 employees and work with 1,700 translators. They are planning an IPO at the end of 2001, or the beginning of 2002, and are currently working with Ericcson on a multilingual cell phone that puts you in touch with a translator or interpreter at the push of a button.

Finally, many old-line localization and translation firms have become attuned to the importance of financial markets and growth: in discussions at the LISA conference in San Jose and elsewhere, they now refer to themselves as “pre-IPO rather than privately owned.”

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John Freivalds
JFA Inc.
5160 Colonial Drive
Minneapolis, MN 55416 USA
Tel +1-612-525-0731
Fax +1-612-525-0659
E-mail: JFA@worldnet.att.net