SDL found in translation

That’s excellent news for SDL (SDL), a provider of content management and language translation services and software. True, it hasn’t been plain sailing for the company for several years. But SDL may have finally mastered the more difficult stages of the three-year transformation programme it announced in 2016. Priced at 19 times forward earnings, the shares are lowly rated compared with other UK tech companies and the valuation, sitting around the middle of the five-year range, suggests limited optimism about management action. We think there is rerating potential should recent tentative signs of progress flesh out.

The IC suggested buying SDL in September 2017 in the early days of the transformation plan. However, results have been slow to come through and margins suffered as the company had to take on more freelance translators. In December 2017, the company said it might miss full-year profit expectations if certain software deals failed to close on time. Such fears were confirmed “in a number of cases” in the following January.

But the narrative improved as 2018 wore on. SDL’s half-year numbers to June told of a “stabilised performance” after “two years of root and branch transformation”. Continuing revenues grew by 2.8 per cent to £143m, or 6 per cent at constant currencies, buoyed by increases across all three business areas: language services, language technologies and global content technologies.

Sales for the largest, the language services division, edged up by 2.6 per cent to £91.8m. And the division's gross margin improved substantially, from 38.4 per cent to 41.8 per cent, reflecting a more than doubling of the rate of usage of machine translation and better controls over freelance expenditure. Not to mention the benefits of SDL’s operational efficiency drive, branded Helix, “starting to materialise” over the six months.

The capitalisation of spending on Helix has been a drain on cash over recent years, but this should soon start to abate. As of last June, SDL had injected £8m into Helix since the end of 2016, with another £2m planned for the second half. But cost savings from Helix should continue to support language services’ gross margin with a year-end target for 45 per cent, compared with 40.2 per cent in 2017.

That target excludes Donnelley Language Solutions, which SDL acquired in July 2018 for $77.5m – facilitated by a £36.2m share placing at 440p. Donnelley is expected to boost earnings in 2019, and it underpins SDL’s increased focus on higher value ‘premium’ content, which is typically found in regulated industries. Donnelley adds a financial services element to SDL’s existing life sciences and marketing segments in this arena.  

And, signalling ongoing positive progress, SDL revealed in January 2019 that revenues should be slightly higher than expected at around £323m-£325m for the year, while stronger cash collections means year-end net cash of £14m will be significantly ahead of forecast. A further sign of things moving in the right direction has been steady upgrades to earnings forecasts since last March, although this was preceded by some noteworthy markdowns.