RWS Delivers Another Strong Year as Strategic Bets Pay Off

The world’s most valuable publicly-listed language service provider (LSP), UK-based RWS Holdings, published full results for the financial year ended September 30, 2019, the close of RWS’ financial year.

Revenues came in at GBP 355.7m (USD 469m). As previously reported after RWS issued a more limited trading statement, this marks an increase of 16% from the GBP 306m achieved during the same period a year ago.

Adjusted operating profit rose 18% to GBP 78.4m (USD 103m) from GBP 66.3m the year before, making RWS arguably the most profitable LSP; or, depending on TransPerfect’s annual results, a close second.

Since its IPO on London’s AIM in 2003, the company has notched up 16 consecutive years of growth in revenues and profits. This winning streak has propelled the company’s shares and boosted its market cap today to GBP 1.7bn (USD 2.3bn). RWS currently employs around 2,500 staff across its subsidiaries in North America, Europe, and Asia.

Over the past four years, the company has delivered on its growth strategy formulated back in 2015 of prioritizing growth in the United States. The US now contributes more than half (53%) of RWS’ revenues with Continential Europe (30%), the UK (9%), and RoW (8%) making up the rest.

Three out of Four

RWS reports results across four divisions: RWS IP Services, RWS Life Sciences, RWS Moravia, RWS Language Solutions. As of the new 2020 financial year, the comparably small Language Solutions unit will be merged with the Moravia division.

RWS IP Services delivered a healthy 12% top-line growth to GBP 125.2m (2018: 111.9m). Profits grew somewhat more modestly and were up 5% to GBP 36.1m (2018: GBP34.4m). The division benefitted from another record year for patent applications.

On the cost side, RWS said it made investments into staffing and improving the “working environment for the staff within the Chalfont St Peter Head office” in order to boost staff retention and reduce churn.

RWS Life Sciences grew revenues by 25% to GBP 65.5m (2018: GBP 52.3m) and managed to improve profit margins; which led to an adjusted operating profit of GBP 20.3m, an increase of 40% over the prior year (2018: GBP 14.5m). RWS attributed this to favourable exchange rates and growth from the additional Life Science customers acquired with Moravia. The underlying revenue growth of the division was a more modest 10%.

Driving growth was the division’s higher-margin Linguistic Validation offering, which expanded by 24%. RWS said that sales of general Life Science services were flat. Furthermore, RWS reported “good progress on the Machine Translation (MT) project with the division’s largest customer” and said they are “beginning to see a positive impact on work volumes arising from the new European Union Medical Device requirements.”

The LSP’s largest division, RWS Moravia, boosted revenues by 18% to GBP 149.9m (2018: GBP 126.9m) and recorded an adjusted operating profit of GBP 25.7m, up a strong 52% over the prior period (2018: GBP 17.0m). Adjusted for various factors, underlying revenue growth came in at 7% and underlying profit growth was 17%.

RWS said the Moravia division achieved 7% underlying revenue growth “despite the ongoing reduction in volumes with one of the division’s top five customers,” and said it saw an encouraging pick up in work from customers outside the top five. Another highlight for Moravia in 2019 was the opening of new divisional headquarters in the Czech city of Brno.

The RWS Language Solutions division had a tough time keeping up with its three much larger peers, reporting a small increase in sales to GBP 15.1m from GBP14.9m and a drop in operating profit to GBP 0.4m from GBP 1.6m. The results are interesting in that they reflect the struggle of many non-specialized, modestly sized LSPs in an age where scale, technology, and niche expertise have become more important than ever.

RWS said the results reflect the fact that Language Solutions is the division most exposed to competition and “has experienced adverse trading conditions in its core markets, particularly in the German automotive and renewable energy sectors, both of which have reduced expenditure on translation services.”

As the Language Solutions division is merged with the Moravia division, RWS hopes “Moravia’s experience and knowledge of Machine Translation will further enhance [the division’s] service levels and efficiencies,” according to the statement.

Wise Move

More broadly on machine translation, RWS said that they “continue to monitor and trial [MT] use and introduce MT into the business where it makes commercial sense to do so and where there is significant additional benefit beyond our existing TM (Translation Memory).” Furthermore, the group plans to leverage Moravia’s MT expertise across the entire company.

Like many others, RWS sees opportunity in content areas where there is no room for error and which require a high degree of creativity. “It is clear that the quality of MT will improve over time and as a leader in language services, RWS will continue to differentiate itself by focusing on translation work in critical areas such as intellectual property and life sciences or where the nuances of localization are highly valued by major global brands,” the same statement said.

RWS has been quiet in terms of M&A in 2019 with the exception of a small acquisition in Canada in January. The highly cash-generative nature of RWS’ business has allowed the LSP to rapidly reduce debt, and company Chairman Andrew Brode said that their “minimal net debt also positions us well to compete for the most attractive acquisition opportunities in our space.” The company said it is looking for “selective opportunities in the intellectual property services and specialist language services spaces.”

Overall, RWS delivered another impressive set of results and continues to do so against its strategy. The acquisition of Moravia in late 2017 has turned out to have been a wise move, transforming the group into a globally diversified LSP; and the integration appears to have been managed well.

At the time of writing, shares in RWS are down 6%. That said, RWS had rallied 15% since the beginning of September 2019 and is still up 33% year-to-date.