Companies: SDL   

SDL International, a provider of translation services to multinational companies, has a cutting-edge software portfolio that helps it and its clients increase efficiency and save money.

The group, which was founded in the early 1990s by chief executive Mark Lancaster to provide consultancy services to small and medium-sized firms wanting to get into global markets, moved quickly into providing contracts for the likes of Microsoft, translating its new software into a variety of languages. In the years since it has entered a range of new market verticals as globalisation stoked demand for more and more translation.

Having evolved into a £130 million turnover concern through strong organic growth and around 20 select acquisitions, SDL now has 50 offices across 30 countries. Customers range from Boris Johnson’s Greater London Authority, which needs to maintain its online content in English, Polish, Arabic and so on, to Volkswagen, which wants to localise product information and technical manuals across more than 150 global markets.

Despite dollar weakness (nearly 40 per cent of sales are derived from the US), results for 2007 were strong, showing a 24 per cent increase in sales to £117.4 million and a 40 per cent pre-tax profits advance to £12.2 million. Highly cash generative, having churned out £16 million from operations last year, SDL had bumper net cash balances of £15.5 million at its December balance sheet date.

Strategy
Multinationals need to ensure that their brand message is consistent from Alabama to Zurich and require products, instruction manuals and box labels to be similarly lucid wherever they are received. Within the industry, this technological process is called global information management (GIM).

It is not a simple process, with accented characters, varying alphabets and changing currencies all complicating matters. As current technology alone cannot deal with the nuance of languages, translation remains a labour-intensive process. Although it is still mostly a service provider, the technical expertise of SDL provides one of its main competitive advantages.

Localisation services – helping companies get their products into multiple markets – represents 70 per cent of sales and in this market new technology and acquisitions have transformed the company from a niche into a mainstream player. A key addition was Trados, acquired in 2005 for £33 million and bringing with it software that allowed SDL to offer customers savings through productivity gains from translation services.

‘We supply a central depository for any technical content to be leveraged by the company, saving them time and money,’ explains Lancaster, citing as an example Hewlett-Packard, which ‘put ten million words a month through and gets 60 per cent leverage’.

This means that people in one department are able to benefit from prior translation work done in another. ‘It gives companies lots of brand control,’ he continues. ‘At Philips, their brand promise of “sense and simplicity” could change dramatically between different translators. Because of this, 40 out of the top 50 global brands standardise on SDL technology.’

Smaller customers are not the most lucrative fare for SDL. ‘We only want clients with at least £500,000 of spend in this area,’ says Lancaster, pointing out that SDL can call on a client list of brand heavyweights including ABN Amro, Bosch, Honda, GlaxoSmithKline, Microsoft, Sony and SAP.

In 2007, the software division, including a raft of subtly different translation systems, enjoyed a 70 per cent surge in new name licence sales, adding customers such as Alcatel-Lucent and Fujitsu Siemens. Trados meanwhile enjoyed double-digit sales growth, a 26 per cent rise in new licences and new wins with Cisco Systems, Deloitte and FIFA.

SDL has tended to grow the services side of its business organically and use acquisitions to bring in technical excellence. Since Trados, two significant acquisitions have been completed – the £47 million takeover of Tridion in 2007 and this year’s $22 million (£11.2 million) purchase of Idiom.

The Tridion deal formed the basis of a new division, global web content management, which helps new customers such as TomTom, Gulf Bank and Disneyland maintain their corporate message across multiple languages and websites. This arm more than doubled its US sales last year, winning over half of its licence revenues from new customers while investing for growth in the US and Asia.

The Idiom deal has added more ‘translation management’ software to the range of GIM systems. Despite losing money from sales of $7.9 million last year, the business is slated to break even during its first year of SDL ownership.

Management
Former design engineer Lancaster, who worked in the US as a project manager at Lotus Development (now part of IBM) and as international development director at US software group Ashton-Tate, occupies both the chairman and chief executive seats. He says the need to separate the roles has not preyed on his mind, since he has a strong and experienced board behind him, most members of which have been with the business for more than ten years.

The board has a strong mix of technical and commercial expertise, with Keith Mills its technical guru.

Now president of the technology division and responsible for the group’s complete technology portfolio, Mills has been with SDL since 1994, having worked with Lancaster at Lotus, where he specialised in the processes of software localisation, and at Ashton-Tate, where he managed its international software translation group.

A healthy weighting of experienced non-executive directors are on hand to proffer advice and strategic support.

Joe Campbell, previously chief executive of Trados, brings relevant expertise in software sales and a good knowledge of the US marketplace. His fellow non-executives are both accountants. Chris Batterham, appointed in 1999, has significant experience in the IT sector, having floated Unipalm Group in London, while John Matthews is perhaps better known as the chairman of housing, property and construction company Crest Nicholson.

Prospects
Prospects for SDL, operating in a $5 billion to $7 billion translation market growing at around five per cent a year, are very positive. Much of this market remains up for grabs, since SDL and two others are the only players with a $100 million-plus share – hundreds of smaller firms account for the remainder. ‘Even if our real addressable market is around $2 billion to $3 billion, we are a consolidator of that space and market evolution is playing into our hands,’ insists Lancaster.

Translation technology, worth $100 million, and web content management, estimated at $750 million, are faster-growing segments of the market, burgeoning by 15 per cent annually apiece. Following the acquisitions of Tridion, Idiom and a 49 per cent share of Belgian-based Trisoft, SDL is strongly placed for market share gains in the latter sector.

SDL has yet to experience any signs of slowdown and 2008 has got off to a flyer, with the company reporting ‘a healthy services order book and a strong pipeline for technology’, while ‘demand from the company’s main vertical sectors remains robust’. Canada has been one area to underperform in 2008, due to banking clients there being hit by the credit crunch, but overall Lancaster says the company is ‘not that exposed to financial services’ and wider economic frailty ‘is not really going to impact us’.

Valuation

Having risen to a seven-year peak of 431p last July, shares in SDL subsequently shed 50 per cent of their value in just over half a year. However, that the shares have since bounced back to previous levels provides encouragement that investors have plenty of faith in SDL.

Benchmarking the business in relation to quoted peers is pointless, since there is no like-for-like listed business and SDL has both services and software interests on which its valuation could be based. George O’Connor, an analyst at independent broker Panmure Gordon, says the historic valuation of SDL has been based upon services but adds, ‘Given SDL’s progress and the significant increase in the tempo of software acquisitions in the past six months, we believe that the software should be factored into its valuation.’ For the time being, he has set a modest price target of 341p for the shares.

This year, O’Connor believes that sales should grow by 17 per cent to £137.8 million, from which profits of £19 million and 19p of earnings would be achieved. For 2009, he expects healthy growth in profits to £24 million and in earnings to 23.4p, placing SDL on a prospective multiple of 14 times. That is a relatively modest rating considering earnings are forecast to grow by more than 20 per cent between this year and next, and SDL has the financial firepower to augment its earnings through further acquisitions. Another independent broker, Landsbanki, is more optimistic – analyst Kevin Ashton foresees £20.1 million pre-tax this year and 19.3p of earnings, rising to £22.6 million and 21.3p next year.

Overall, we believe that SDL, maintaining a strong order book, operating in markets that will prove more robust than they are currently being considered to be and armed with new software with which to wrest a larger piece of the pie, is a buy for the long term.

SDL International	LSE	£191.78m	253.25p	-26.75p
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