Moravia Drives RWS Revenue Growth But Not Margin Expansion

London-listed language service provider RWS released its final first half results to March 31, 2018, confirming the headline performance of its April trading update and its acquisition strategy as the primary growth driver. Moravia, acquired in November 2017 for USD 320m, contributed 83% of the group’s GBP 63.0m (USD 84.8m) increase in revenue to GBP 139.6m (USD 187.9m).

Underlying revenue growth excluding acquisitions (Moravia, Luz and Article One Partners) and currency effects was a more modest 5%, as healthier growth at the smaller Patent Information (+11%) and Life Sciences (+9%) divisions were subdued by no growth in core Patent Translation division. This single digit organic revenue growth is similar to the majority of Tier 1 companies in the Slator Language Service Provider Index (LSPI).

Similarly, net profits, inclusive of acquisitions, grew only 18% to GBP 12.6m (USD 16.9m) as acquisition and finance costs, the amortization of acquired intangibles and a higher group tax rate ate into the bottom line. However, an “excellent” second-half start for Moravia plus expectations of further integration savings and a lower group tax rate have earned RWS buy-ratings from Numis Securities and Berenberg.

A Transformational Period

RWS now runs five separate divisions. Moravia is the largest by revenue but Patent Translation and Life Sciences deliver much better margins.

Revenue in Patent Translation and Filing was flat as 7% growth in Worldfile offset weak European sales. Nevertheless, the division’s strong margins delivered an adjusted operating profit of GBP 15.5m (USD 20.8m), 3.3 times the size of Moravia’s GBP 4.7m profit contribution.  Continued growth in PCT (Patent Cooperation Treaty) and European patent applications are expected to support organic growth in key markets and RWS says it is looking to convert Moravia’s reputation among large Chinese corporates into new patent clients at it invests to expand in this strategic growth market.

Good growth in key markets, increased cross-selling between Luz and CTi (a 2015 acquisition), and the full half impact of Luz, acquired in February 2017, drove 54% revenue growth in Life Sciences to GBP 26.2m (USD 35.2m). Its 31% adjusted operating profit margin is also on par with Patent Translation, reflecting RWS’ pricing power within regulated industries, and the Life Sciences division is also investing in Japan and China.

Moravia’s revenue grew 9% to GBP 52.1m (USD 69.7m) in its comparative 5-month contribution, despite a reduction in volumes from one of its top five customers and a weaker USD, its primary billing currency. “Excluding the effect of the lost Microsoft Windows contract, this growth would be 17%,” Berenberg advised in its results commentary.

With the aim of improving Moravia’s margins through further cost savings, RWS has restructured Moravia’s management team and operational responsibilities and folded its life science business into the Life Sciences division. Paul Danter, former EVP, Business Development & Client Services, was appointed as CEO of Moravia in January 2018 and former CEO Thomas Kratochvil was appointed to the RWS board as an Independent Non-Executive Director in March 2018.

Language Solutions and Patent Information collectively represents 9% of revenue and was indicated to grow further following the integration of Article One Partners, division restructures, the sharing operational resources, and intergroup sales referrals.

A Trump Tax Bump and Acquisition-led growth

Like much of corporate America, RWS will benefit from the recent US Tax reform. “The reduction in the Federal tax rate from 35% to 21% will lower our overall tax rate to circa 23% in the current financial year and to 21% in 2019,” said Chairman Andrew Brode in the results announcement. “The change will, therefore, have a material positive impact on earnings per share and cash generation.”

Furthermore, RWS will “focus assimilating Moravia and driving synergies across the enlarged group”, said Brode, and will “continue to review selective potential acquisitions in the IP support services and specialist translation spaces that would further accelerate growth.” As with the Moravia purchase, RWS could issue new shares and combine it with debt. Net debt at March 31, 2018 was a manageable GBP 82.8m (USD 111.0m).

Investors have warmed to this news and the broker buy calls, with the shares popping 10% to GBP 401 the day of results announcement.