Buy SDL on bad news

The company has three core divisions: language services, language technologies and global content technologies. The first of these delivered the highest sales growth at the interim stage of 19.3 per cent, or 8.9 per cent at constant currencies. However, sales in faster-growing segments have outstripped operational efficiencies, meaning costs rose and the division’s gross margin fell from 43.0 per cent to 38.1 per cent. But this dilutive effect is already being managed: freelancers had been employed to manage rising sales, but the company intends to take more translation services in-house to reduce these costs. 

Language services had seen particularly strong revenue growth in the Asia-Pacific region, but the gross margin was dampened down, partly by the relative complexity of using machine translation services for Asian languages. That said, progress is being made in the machine translation of Japanese, so management is confident that the usage of machines should drive greater productivity in future. Constant-currency growth was also solid at the language technology unit, although fell at the global content division on a tough prior-year comparative.

The company has been investing generally in systems and infrastructure to enable automation, and has already launched a freelancer portal and a new business management platform. All in all, the productivity programme is on track, and management has actually pulled some investments forward by around six months. They concede that this will mean costs rise in the remainder of this year, but the benefits of the investments should show sooner in 2018. Language services’ margins are expected to benefit from the resultant cost reductions.

SDL’s net cash position has improved to £26.1m at the end of June, helped partly by the disposal of non-core assets. The group has also not yet drawn down on its £25m revolving credit facility.