SDL Shares Soar on Resilient Earnings in First Half of 2020

“I think people are positively surprised by the results of the business,” SDL’s CEO Adolfo Hernandez told Slator in a phone interview on August 11, 2020. The UK-based language services and technology provider had just released earnings for the first half of 2020 and shares in the London-listed company had jumped nearly 20% by midday.

Clearly, analysts were pleased. Brokers Numis, N+1 Singer, Investec, and Peel Hunt all upgraded their full-year forecasts and now rate SDL a “buy.”

Asked about the soaring share price, SDL CFO Xenia Walters said, “All the brokers are saying, and justifiably, that we were left behind in the sector rally. So it was [a case of] resetting it today.” (Shares in rival RWS hit an all-time high in the week of August 10).

It is not that SDL delivered breakneck top-line growth or dramatically widened profit margins. Revenue was essentially flat at GBP 180.7m in H1 2020 (vs. GBP 182.5m in H1 2019) and adjusted operating profit came in at GBP 16.3m in H1 2020 (vs. GBP 16.1m in H1 2019). But in the face of a once-in-a-lifetime pandemic, SDL had shown impressive resilience, analysts were quick to note, highlighting the company’s “positive momentum” for the remainder of the year.

“All the brokers are saying, and justifiably, that we were left behind in the sector rally” — Xenia Walters, CFO, SDL

The market was also impressed by SDL’s strong cash management. The LSP ended the first half with GBP 35m in cash with no debt, up strongly from GBP 1.1m in net cash at the end of 2019.

Moreover, there was a consensus that SDL’s various productivity and efficiency initiatives — more in-house translators, increased adoption of internal linguistic productivity management tool Helix, etc. — have started to bear fruit.

The performance of SDL’s three business units was remarkably stable. Revenue in Language Services dipped slightly to GBP 125.9m in H1 2020 from GBP 128.4m in H1 2019, Language Technologies (Trados, SDL Language Cloud, etc.), increased marginally to GBP 25.6m from GBP 25.6m, and Content Technologies (Tridion, Contenta, etc.) rose to GBP 29.1m from GBP 28.5m. The story was similar with profits, as shown in the table below.

In terms of individual verticals and products, there were no surprises. Enterprise Technology, Online Retail, and Life Sciences performed well. Travel and Hospitality, Traditional Retail, and Automotive struggled.

On the product side, SDL flagged a 14% revenue decline in Translation Productivity, driven by soft sales of SDL Trados on “tough trading conditions, particularly in China, Japan and some markets in EMEA.”

Hernandez told Slator that the drop in Trados sales was largely due to the end of the product cycle, ahead of the August 2020 launch of SDL Trados Studio 2021. Revenue in Machine Translation, meanwhile, grew by 46% year-on-year.

Operationally, SDL appears to have managed the transition to a fully remote workforce well. The company said the substantial majority of its 4,500 employees continue to work remotely and are expected to continue to do so throughout the remainder of 2020.

“[As a global management team] we have been working remotely for the best part of three years,” CEO Hernandez told Slator when asked how he interacts with his leadership team. While SDL’s C-suite used to meet in person every two months or so, they now meet more often but do so virtually.

Physical Dollars to Online Dollars

Asked about how SDL runs sales during a global pandemic, Hernandez pointed out that the company’s size means that raw lead gen can be less of a priority than building on existing relationships. “If you have a relationship in place, it’s easier to maintain the relationship online. If all you do is cold calling and hunting, it’s a little bit harder online so maybe that’s why our teams have adapted easier.”

In terms of Marketing, Hernandez said that “since March [2020], we’ve put our marketing plan on its head. We’ve been a lot more focused on, obviously, communications. [In terms of marketing spend], we have shifted a lot of the physical dollars to online dollars.

In terms of Operations, SDL continues to shift more volume to in-house translators in order to expand margins. This is somewhat unusual as, typically, full-time in-house translators tend to be more expensive when LSPs consider overall cost. However, as compared to smaller LSPs, SDL’s size means it can better manage volumes across a large pool of in-house linguists.

According to CFO Walters, SDL took on “8% more translators to help with the insourcing project. 8% roughly equates to about 100 translators, which joined us in the first half of this year.”

Walters continued, “We’ve been insourcing more content from [acquired Donnelley Language Solutions] onto the SDL supply chain so I think the addressable content [from DLS] now is 80-90%. It comes into the former SDL supply chain and either gets translated by an in-house translator or, if it’s really specialist content, it might continue to be outsourced externally. We’re doing more and more insourcing, which means we need to take on more translators.”

“Partially my paranoia”

On the product side, highlights include the launch of SDL Trados Studio 2021 and on-demand translation platform SLATE.

Asked what triggered the addition of SLATE to SDL’s ever growing list of products, Hernandez said that “I guess it was partially my paranoia a year and a half ago. I could see that the cloud technology was getting good enough and that there was a market for extremely low-touch, very agile, simple solutions, across everything including translation.”

“We built [SLATE] on the back of the products that we had,” he continued. “We had the translators to do post editing, we had the neural machine translation to do post-editing. We had cloud solutions by way of Language Cloud. We had all of the components and we wanted to build ourselves that very elastic, very easy-to-use channel for the occasional buyer, for the non-localization specialist.”

While SLATE still has to prove it can find a market and customer base, SDL Trados has been a market leader for decades. But major changes are afoot there too. With the SDL Trados Studio 2021 release, SDL introduces “a new subscription-based payment option to the existing perpetual license payment options.”

Hernandez said they are not yet ready to disclose the different pricing tiers but mentioned they conducted extensive research and talked to lots of clients to find the right price point.

Investors, for one, seem confident SDL will strike the right balance. Rating the stock a “buy,” brokerage firm Peel Hunt wrote in a note that “SDL is trading on 8x consensus CY21 EBITDA vs 16x for the localization companies and 13x for a weighted average of software/services. This is highly undervalued.”

Referring to their own financial models, broker Numis concurred, rating SDL a “buy” as well, “given the resilience displayed, the level of IP in the business, and its ability to take advantage of growth opportunities (organic and M&A) going forward.”

Covid-19 has also changed the way listed companies interact with investors. As Hernandez noted, “We ran the last two roadshows exclusively online and it worked.”

As of press time, shares in SDL had climbed 30% on the back of the H1 2020 results, adding around GBP 125m to the company’s market capitalization.