SDL.L Regulatory News (SDL)

5 August 2014

SDL PLC

Interim results for the six months ended 30 June 2014

A period of significant transformation, enhancing our capabilities to deliver solutions for Customer Experience Management

SDL plc ("SDL", "the Group" or the "Company"), a leader in Customer Experience Management solutions, announces its unaudited interim results for the six months ended 30 June 2014.

First half highlights

· Group revenues £129.1m, up 4% at constant currency despite a marginal fall in reported revenues

· Group Profit before One-Off costs, Amortisation and Tax ("PBTA") £6.7m vs last year of £2.8m, up 168% at constant currency

· Language Services constant currency revenue growth of 4%, gross margin 44%, net contribution 15%

· Technology bookings up 16% at constant currency (H1 2013 to H1 2014)

· Technology Annual Recurring Revenue ("ARR") up 4.5% at constant currency in first half

Mark Lancaster, Chief Executive Officer, commented:

The significant sales, marketing and operational restructuring that SDL executed in late 2013 has provided the business with the delivery capability it requires for sustainable growth. Our first half performance is encouraging and confirms the Board's optimism about the future.

The Board's expectations for 2014 remain unchanged and the Board remains confident in the Group's strategy and ability to deliver long term shareholder value.

For further information please contact:

About SDL

SDL (LSE: SDL) allows companies to optimize their customers' experience across the entire buyer journey. Through its web content management, analytics, social intelligence, campaign management and translation services, SDL helps organizations leverage data-driven insights to understand what their customers want, orchestrate relevant content and communications, and deliver engaging and contextual experiences across languages, cultures, channels and devices.

SDL has over 1,500 enterprise customers, over 400 partners and a global infrastructure of 70 offices in 38 countries. We also work with 72 of the top 100 brands. For more information, please visit http://www.sdl.com. 

Chairman's Statement

The first half of 2014 has seen a necessary period of consolidation and bedding in of our new organisation. As I wrote in my statement accompanying our preliminary results in March, 2013 was a period of great change for the Group executed with speed and commitment. Given the amount of change that took place last year, it is encouraging to report on a first half of steady progress towards our goals. It is pleasing to see the resumption of significant organic technology bookings growth and that our Language Services business has returned to the historic levels of profitability.

This is testimony to our strong brand, outstanding customer base and key technologies. The synergies we are extracting have helped us increase our gross margin and stabilise our operating profit. The full impact of these changes will take some time to be visible within our Income Statement.

As I reported at the last year end, whilst Mark Lancaster has been strengthening the Executive Management team, we have also been working together to strengthen the Board. Our new Senior Independent Non-Executive Director, Alan McWalter and our new Remuneration Committee Chair, Glenn Collinson, have now had a few months to settle into their new roles. I believe they will make valuable contributions to the future success of our company.

Although we have made good progress during the first half of the year, and the leading indicators are beginning to evidence that progress, it is still a little early to be able to predict precisely when the business will again be achieving its full potential. Our first half performance is encouraging and confirms the Board's optimism about the future.

David Clayton

Chairman

CEO Review

First half highlights

· Group revenues £129.1m, up 4% at constant currency despite a marginal fall in revenues

· Group Profit before One-Off costs, Amortisation and Tax ("PBTA") £6.7m vs last year of £2.8m, up 168% at constant currency

· Language Services constant currency revenue growth of 4%, gross margin 44%, net contribution 15%,

· Technology bookings up 16% at constant currency (H1 2013 to H1 2014)

· Technology Annual Recurring Revenue ("ARR") up 4.5% at constant currency in first half

· Largest number of significant Technology licence bookings in the history of SDL, including Akamai Technologies, House of Fraser, Lloyd's Register, Schneider Electric, Specsavers and TomTom 

· Launch of the SDL Customer Experience Cloud™, a unified suite of offerings to help marketers create and deliver seamless global customer experiences across all channels, devices and languages. 

· Launch of the SDL Language Cloud™, a cloud translation platform that empowers organizations to easily communicate across languages and engage global customers.

· Further strengthening of the executive team with the appointment of Bernadette Nixon, an experienced software sales leader, as Chief Revenue Officer.

Customer Experience Management

SDL started life as a Language Services business. We then invested into language technology, believing that language would become one of the key requirements for anyone engaged in global trade. SDL subsequently built one of the largest and most profitable language solution companies in the world. As the market increasingly accepts the importance of language in customer engagement, our continued investment into the future of language technology and language services infrastructure creates significant differentiation in our Customer Experience Cloud offering.

Ten years ago we believed that digital content management technology would be crucial to enable businesses to engage with their customers as those interactions became more digital. Over the last ten years SDL has invested in this vision. SDL has acquired, and then further developed, technology to create a single integrated technology suite.

In January 2014, we launched the SDL Customer Experience Cloud™, a unified suite of offerings to help marketers create and deliver seamless global customer experiences across all channels, devices and languages.

The SDL Customer Experience Cloud integrates web content management, campaign management, social intelligence, customer analytics, e-commerce, language solutions and document management. The technology suite empowers entire organisations from the marketing department through to customer support in order to understand, create, manage and deliver contextually relevant customer experiences that drive better marketing decisions, e-commerce success and long-term customer engagement.

In June 2014 we launched the SDL Language Cloud™, the first cloud-based language platform to offer the full spectrum of translation options - human, machine and specialist machine translation - providing a solution for translating all content, from highly branded campaigns to websites, support content, user reviews and instant chat. With this platform, marketers benefit from the ability to engage customers around the globe, across every touch point, in the right language, providing a culturally relevant and seamless experience for the buyer. Brands can now create content and experiences and weave them together into the local language at the point of creation, delivering communication where the customer wants to see it, in the language that they want to see it in.

First Half Performance

It is in this historic context that we present our interim results. The restructuring the business undertook in 2013 was essential to enable SDL to fully maximise the opportunity in the marketplace. Our One SDL initiative is essential for us to fully leverage the technologies we have, the customers we serve across the business and the talented people who bring these solutions to reality.

A key backbone of our group is our Language Services business, which I am pleased to say, has returned to constant currency growth during the first half whilst also improving levels of profitability. In our Technology business the improved performance will take longer to impact the income statement. The solid growth in bookings is a positive lead indicator. Given the size and complexity of some of the solutions we are now delivering to our customers and the increase in our subscription based business, the rate at which bookings will translate into recognised revenue will be somewhat slower than has been the case in the past. The improvement in our annual recurring revenue from services such as support and maintenance is also providing a good underpinning to our revenue outlook. Although we are encouraged to see some momentum returning to the sales side of our business, we must be cautious about the speed of the turnaround. As a consequence, we have managed our costs carefully in order to protect the Group's profitability and cash flows.

Outlook

Our Technology bookings and annual recurring revenues are increasing as a result of our restructuring and investments. Our Language Services division has recovered to deliver high gross and net margin stability and we expect to see this continue to improve as we move towards 2015. We also expect to see Language Services growth improving in 2015, due to sales restructuring in North America. The full extent of the organisational restructuring is yet to be delivered and we believe it will be well into 2015 before we will really feel the impact of our restructuring and investments. Many of the longer term investments in technology will deliver in late 2015 and early 2016.

As the world fully embraces the digital age, businesses have recognised the need to completely change the way they operate to successfully engage with their customers. Customers now expect in context, immediate and relevant information at all stages of the customer journey. Language is becoming more important in Customer Experience Management delivery as the world becomes a smaller place through advances in technology.

With the significant sales, marketing and operations restructuring SDL executed in late 2013 we now feel we have the delivery capability, which we lacked in the past. Our first half performance is encouraging and confirms the Board's optimism about the future.

The Board's expectations for 2014 remain unchanged and the Board remains confident in the Group's strategy and ability to deliver long term shareholder value.

Financial Review

Summary Performance

The Group's performance in the first half was in-line with the Board's expectations. Revenues were £129.1 million (2013: £131.0 million). Profit before taxation, amortisation of intangible assets and one off costs ("PBTA") was £6.7 million (2013: £2.8 million). Gross cash in the business at the half year was £16.9 million (31 December 2013: £18.2 million) and net cash after borrowings was £1.9 million (31 December 2013: net debt £1.8 million)

Headline revenue decreased by 1%. Organic growth of 4% was offset by adverse foreign currency effects of 5%. Language Services and Technology segments have grown by 4% and 2% respectively on a constant currency basis.

Cash generated from operations was £7.1 million (2013: £9.6 million). Cash generation in the period has been impacted by cash outflows associated with the prior year restructuring programme and the cash settlement of retention share plans. Capital expenditure was reduced at £1.3 million following the prior year investment in SaaS Cloud infrastructure (2013: £5.0 million). Tax paid was £1.5 million (2013: £4.8 million).

Performance by Segment

Following the 2013 restructure, the Group now has two reportable segments:

Language Services (contributing £72.9 million or 56% of total revenue and £11.3 million of PBTA) (2013: contributing £73.4 million or 56% of total revenue and £8.6 million of PBTA).

Segment revenue reduced by 1% in the period, comprising an underlying increase of 4% at constant currency, and a 5% adverse foreign exchange impact. Revenue growth has been strongest in Europe which grew at 8% on a constant currency basis.

The strong second half margin performance seen in 2013 has continued into 2014. Gross margins have recovered to 44% in the first half as the benefits of operational initiatives including expanded use of automated translation technology, new workflow efficiency tooling and use of low cost production centres have been realised.

Segment PBTA margin increased to 15% (2013: 12%).

New clients in the period include SuperGiant Games, 505 Games, Steelcase, Rentokil, China Southern Airlines and TradeStation Securities.

Technology (contributing £56.2 million or 44% of revenue and losses of £4.6 million PBTA) (2013: contributing £57.6 million or 44% of revenue and losses of £5.8 million PBTA).

Segment revenue reduced by 2% in the period, comprising an underlying increase of 2% at constant currency offset by a 4% foreign currency impact.

The Group has maintained investment in its sales, marketing and operations teams in the period. Several key commercial measures have improved demonstrating sales momentum and improved revenue visibility of the business for the future:

· Bookings in the period were £50.1 million, an improvement of 16% on the prior period (£43.1 million) at constant currency;

· The new bookings pipeline for the second half is 2.6 times forecast new bookings;

· At the end of June, Annual Recurring Revenue (ARR) from SaaS and perpetual support and maintenance contracts was £64.5 million, an increase of 5% on December 2013 (£61.7 million), at constant currency.

New customers who bought our technology solutions during the period include Akamai Technologies, House of Fraser, Lloyd's Register, Schneider Electric, SNL Financial, Specsavers and TomTom.

SDL plc

Interim Condensed Consolidated Income Statement

Adjusted earnings per ordinary share (basic and diluted) are shown in note 5.

SDL plc

Interim Condensed Consolidated Statement of Comprehensive Income

All the total comprehensive income is attributable to equity holders of the parent Company. A currency translation difference on a foreign operation may be reclassified to the Income Statement upon disposal of that operation. There are no other items included in Other Comprehensive Income that may be reclassified to the Income Statement in the future.

SDL plc

Interim Condensed Consolidated Statement of Financial Position

The Interim Financial Information presented in this Interim Report was approved by the Board of Directors on 4 August 2014.

SDL plc

Interim Condensed Consolidated Statement of Changes in Equity

These amounts are attributable to equity holders of the parent Company.

SDL plc

Interim Condensed Consolidated Statement of Cash Flows

SDL plc

Interim Condensed Consolidated Statement of Cash Flows

SDL plc

Notes to the Interim Condensed Consolidated Financial Statements

1. Basis of preparation and accounting policies

Basis of preparation

The annual financial statements of the Group are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the EU. The interim condensed consolidated financial statements for the six months ended 30 June 2014 have been prepared on a going concern basis in accordance with IAS 34 Interim Financial Reporting.

As required by the Disclosure and Transparency Rules of the Financial Conduct Authority, this condensed set of interim financial statements has been prepared applying the accounting policies and presentation that were applied in the preparation of the Company's published consolidated financial statements for the year ended 31 December 2013.

The preparation of condensed consolidated interim financial statements in conformity with IFRSs requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results for which form the basis of making the judgements about carrying values of assets and liabilities that are not readily available from other sources. Actual results may differ from these estimates.

The principal risks and uncertainties were disclosed in the Group's annual report and financial statements for the year ended 31 December 2013 and remain broadly unchanged. SDL has an established process both to manage risk and to seek to mitigate the impact of risk as much as possible should it materialise. Operational risks include management succession, system interruption and business continuity, data protection, compliance, contract management, integration of acquisitions, maintaining technology leadership and intellectual property. Financial risks include liquidity, counterparties, interest rates and financial reporting.

Going Concern

In line with code requirements the Directors have made enquiries concerning the potential of the business to continue as a going concern. Enquiries included a review of performance in 2014, 2014 annual plans, a review of working capital including the liquidity position and a review of current indebtedness levels. The Directors confirm they have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Given this expectation they have continued to adopt the going concern basis in preparing the interim financial statements.

2. Segment information

The Group operates in the Customer Experience Management industry. For management reporting purposes, the Group is organised into business units based on the nature of their products and services. Following the consolidation of the Group's reorganisation in 2013, the Group has two reportable operating segments as follows:

· The Language Services segment is the provision of a translation service for customers' multilingual content in multiple languages.

· The Technology segment is the sale of enterprise, desktop and statistical machine translation technologies, content management technologies, campaign management, social media monitoring and marketing analytic technologies together with associated consultancy and services.

Management monitors the operating results of its business units separately for the purpose of making decisions about resource allocation and performance assessment prior to charges for tax and amortisation.

In accordance with IFRS 8, the operating segments for the comparative period have been restated to the operating segments that exist in 2014. Prior year comparatives have also been restated to present segment costs and profitability on a consistent basis.

Six months ended 30 June 2014 (unaudited)

Six months ended 30 June 2013 (unaudited) - restated

Twelve months ended 31 December 2013 (audited) - restated

Segment assets

(1) Segment assets do not include cash (£16.9m), Corporation Tax (£4.5m) and Deferred Tax (£5.2m).

(2) Segment assets do not include cash (£20.6m), Corporation Tax (£1.9m) and Deferred Tax (£4.6m).

(3) Segment assets do not include cash (£18.2m), Corporation Tax (£3.5m) and Deferred Tax (£3.7m).

Revenue by geographical destination was as follows:

3. Operating profit / (loss)

4. Taxation

A tax charge in respect of foreign currency translation differences on foreign currency loans to foreign subsidiaries of £0.2m was recognised in the statement of other comprehensive income in the six months to June 2014 (June 2013: £0.2m credit; December 2013: £0.1m charge).

A tax credit in respect of share based compensation for current taxation of £nil (June 2013: £nil; December 2013: £nil) has been recognised in the statement of changes in equity in the period.

A tax charge in respect of share based compensation for deferred taxation of £nil (June 2013: £nil; December 2013: credit of £0.2m) has been recognised in the statement of changes in equity in the period.

5. Earnings per share

6. Dividend per share

Dividends paid in the six months ending 30 June 2014 were £nil (June 2013: £4.9m; December 2013: £4.9m). The dividend paid in 2013 amounted to 6.1 pence per share.

7. Interest-bearing loans

During the period, the Group repaid £5.0 million. At 30 June 2014, the Group had a £30 million facility with Royal Bank of Scotland and had drawn down £15m of the facility. On 4 August 2014, the Group signed a facility amendment under which the Group has the option to extend the facility term from September 2015 to June 2017 as long as agreed performance targets are met.

8. Share-based payments

On 1 January 2014, 53,526 and on 7 April 2014 1,007,429 Long Term Incentive Plan (LTIP) shares were awarded and on 7 April 2014 227,500 stock options were awarded to certain key senior executives and employees of the SDL Group. The exercise price of the options was 333.5 pence, representing the mid-market price on the day before grant.

9. General notes

The comparative figures for the financial year ended 31 December 2013 are not the Company's statutory accounts for that financial year. Those accounts have been reported on by the Company's auditor and delivered to the registrar of companies. The report of the auditor was (i) unqualified, (ii) did not include a reference to any matters to which the auditor drew attention by way of emphasis without qualifying their report, and (iii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006.

10. Events after the statement of financial position date

There are no known events occurring after the statement of financial position date that require disclosure.

Responsibility Statement by the Management Board

We confirm that to the best of our knowledge:

· the condensed set of financial statements has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU;

· the interim management report includes a fair review of the information required by:

(a) DTR 4.2.7R of the Disclosure and Transparency Rules, being an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of financial statements; and a description of the principal risks and uncertainties for the remaining six months of the year; and

(b) DTR 4.2.8R of the Disclosure and Transparency Rules, being related party transactions that have taken place in the first six months of the current financial year and that have materially affected the financial position or performance of the entity during that period; and any changes in the related party transactions described in the last annual report that could do so.

For and on behalf of the Board

Dominic Lavelle

Chief Financial Officer

INDEPENDENT REVIEW REPORT TO SDL PLC

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 which comprises the Interim Condensed Consolidated Income Statement, Interim Condensed Consolidated Statement of Comprehensive Income, Interim Condensed Consolidated Statement of Financial Position, Interim Condensed Consolidated Statement of Changes in Equity, Interim Condensed Consolidated Statement of Cash Flows, and the related explanatory notes. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

The half-yearly financial report is the responsibility of, and has been approved by, the directors. The directors are responsible for preparing the half-yearly financial report in accordance with the DTR of the UK FCA.

The annual financial statements of the group are prepared in accordance with IFRSs as adopted by the EU. The condensed set of financial statements included in this half-yearly financial report has been prepared in accordance with IAS 34 Interim Financial Reporting as adopted by the EU. 

Our responsibility is to express to the company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 Review of Interim Financial Information Performed by the Independent Auditor of the Entity issued by the Auditing Practices Board for use in the UK. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2014 is not prepared, in all material respects, in accordance with IAS 34 as adopted by the EU and the DTR of the UK FCA.

Paul Gresham

for and on behalf of KPMG Audit Plc

Chartered Accountants

15 Canada Square

London

E14 5GL

5 August 2014