Acquisition translates to growth for RWS

Accounting for 41 per cent of group sales, recent momentum has been led by Moravia, the localisation services provider acquired in 2017. With 10 per cent underlying growth, revenue increased to £71.1m in the first half of 2019. This is despite lower volumes from a top client, which management attributes to a “transition period”, as Silicon Valley technology customers often have a lag between maturing projects and their replacement with newer propositions. With increased uptake of higher-margin localisation services, benefits of a post-acquisition reorganisation and tighter cost control, the margin has more than doubled to 19.3 per cent. Currency movements and an extra month of ownership meant the division's operating profit increased from £4.7m to £13.7m.

Moravia opens up cross-selling opportunities across the group. This should particularly benefit IP services, which accounted for 36 per cent of first-half sales and is already capitalising on the global rise in patent filings – the World Intellectual Property Organisation reported a 4 per cent increase in international patent filings last year. Despite 13 per cent organic first-half revenue, adjusted operating profit remained flat due to higher spending in the UK to retain EU national staff prior to Brexit. The underlying operating margin fell from 31.7 per cent to 27.5 per cent, but an improved second half means broker Berenberg forecasts 5 per cent profit growth for the full year.

IP services is leading a strategic pivot towards China as the country is projected to leapfrog the US to become the largest patent filer. With the transition from ‘made in China’ to ‘designed in China’ fuelling domestic demand, growth here may help counter oncoming headwinds elsewhere, notably the proposed EU Unitary Patent (which allows a single patent to be filed to cover 26 EU countries). Although expected to commence in the first half of 2020, this remains unclear amidst a legal challenge in Germany and uncertain UK involvement post-Brexit. Until the new format is proven, RWS believes clients may opt to stick with the existing system.

Moravia has increased the group’s exposure to foreign exchange movements, with over two-thirds of revenue now denominated in US dollars. Although hedging has reduced volatility and there was a currency tailwind during the first half of 2019, dollar weakness did trigger a profit warning in April last year.