Investment in the future remains a key feature of the business.
In November 2012, SDL announced that it would be increasing its
expenditure on sales and marketing by approximately GBP3 million to
GBP4 million. Following further analysis of the market we have
concluded it is important to invest a further GBP4 million to GBP5
million into infrastructure and research and development to take
full advantage of the market opportunity. The total amount that
will be expensed in 2013 for these investments will be around GBP8
million to GBP9 million. These investments will be in:
- Creating an SDL Consulting division focused on selling
integrated Customer Experience Solutions.
- Enhanced structure in our Language Technologies division to
launch our new Software as a Service platform, Language Gateway,
and enhance our Machine Translation sales.
- Sales and marketing infrastructure in our Content Management division.
- Sales and marketing infrastructure and research and
development into our Business Analytics and Social Intelligence
divisions.
- Internal and external Group Marketing and infrastructure across the business.
We believe it is necessary to make the above investments to
fully realise the potential of our technology stack and services
offerings. SDL is considered by both Forester and Gartner to be a
leader and innovator in our field with our Global Information
Management technology stack.
Dividend
The board remains confident in the operational cash generation
of the business and is recommending a final dividend to the Annual
General Meeting of 6.1 pence per ordinary share, a 5.2% increase
over the dividend paid in the preceding year.
Management change
As previously announced in November 2012, Mark Lancaster,
Executive Chairman, stepped into the role of Chief Executive
Officer following John Hunter's decision to leave SDL to pursue
other interests.
Outlook
Although the macro economic situation in Europe remains
challenging, demand in key northern European economies is expected
to remain stable in 2013. Slow recovery in North America is
expected to continue at the macro-economic level, and the prospects
in developing and emerging markets in Asia and South America are
strong.
We remain confident in our outlook for sales in 2013 and we will
make significant discretionary marketing, sales and R&D
investments of GBP8 million to GBP9 million in 2013 to return SDL
to strong technology growth. This will enhance technology revenue
growth in 2013 but will reduce profits for 2013, particularly in
the first half of the financial year. These investments will take
SDL to a new level, creating a solid platform to deliver
significant sustained revenue growth and profitability to 2014 and
beyond.
SDL remains well positioned for growth and stability selling
into multiple geographies and across a variety of sectors. SDL has
increased its presence in Asia and North America in 2013, partly
due to the addition of Alterian and partly due to organic
investment.
We enter 2013 with a compelling set of products and solutions
and a great vision that has proven delivery over the years. Our
pipeline is strong and gives us confidence through 2013 and beyond.
The Board remains confident in the Group's strategy and execution
capability. The balance sheet is strong, enabling both organic and
acquisition growth opportunities to be pursued as they are
identified.
As we look forward, the Board is confident in the Group's growth
prospects and long term potential to deliver future profitable
growth and shareholder returns.
OPERATING & FINANCIAL REVIEW
Performance overview
2012 was a year of significant strategic progress for SDL with
the acquisition of Alterian, a transaction which brought integrated
marketing capabilities to complement SDL's Customer Experience
Management proposition. A steady operating performance was
maintained by the swift and effective integration of Alterian,
which delivered stability to Alterian's clients, partners and
staff. The Alterian Campaign Management & Analytics and Social
Intelligence businesses have been combined in a new reporting
segment, with the former Alterian Web Content business now being
accounted for within SDL's Content Management Technologies
segment.
SDL's business is made up of a combination of
-- Software as a Service licences, primarily from our Analytics,
Social Media and Language technology platform.
-- Perpetual software licences, primarily from enterprise web
content management, enterprise translation management and desktop
translation productivity software sales.
-- Support and Maintenance from the enterprise products.
-- Language and consulting services.
Software as a Service licence bookings across the business
increased by 6%, making up 45% of total licence bookings.
Perpetual Software licence bookings for the business decreased
by 12%.
Our recurring software revenues comprising Software as a Service
and Support & Maintenance revenue streams account for 51% of
technology revenues.
Services revenue increased organically by 12.4% in 2012; 89% of
services revenue in 2012 was from recurring customers (2011: 92%).
The reduction in the year reflects a high level of new customer
acquisition, with the underlying rate of recurring business broadly
unchanged.
We increased our Research and Development investment (none of
which is capitalised) by 48% in 2012 to GBP21.8 million (2011:
GBP14.8m), which included a 33% increase relating to the acquired
Alterian business.
The best performing segment in 2012 was Language Services, which
grew at 12.4% at constant currency, offsetting weaker performance
in Technology which declined 1.6% organically.
Asia was the strongest revenue growth region in 2012. Demand in
North America was strong in Language Services but offset by weaker
technology performance. Asia, where we continue to diversify the
customer base in both Technology and Services, has recovered
strongly from a flatter performance in 2011 with some important new
wins. Organic growth in continental Europe shows a small increase
where the demand environment is less strong. The Alterian
acquisition increases our footprint in North America and Asia and
already we see strong demand in line with our existing regional
pattern. We continue to expand our global infrastructure, having
invested in additional facilities in Asia and the Americas to match
growing demand in these regions.
These factors saw headline revenue growth of 17.6% to GBP269.3
million, driven by underlying organic growth at constant currency
of 6.7%, 12.4% growth from acquisitions and a 1.5% decrease from
currency effects.
With the acquisition of Alterian, Technology revenue, as a
percentage of total Group revenue, has increased from 41% in 2011
to 44% in 2012. We see the market opportunity in Technology as
greater than ever with Alterian supplementing our core technologies
and giving us and our clients the potential to seamlessly integrate
Customer Experience Management solutions. We are fully committed to
maintaining appropriate levels of investment to fully exploit these
opportunities whilst continuing to deliver profitable growth.
Overall, Group operating margin before amortisation was reduced
at 13.2% (2011: 17.3%), reflecting continued investment in
innovation, one-off administrative expenses associated with the
Alterian acquisition and a more cautious view of
percentage-of-completion and cost-to-complete of certain services
contracts in the second half of the financial year.
Excluding acquisition related one-off costs and Language Weaver,
which has continued to attract strategic investment in 2012, group
operating margin was 14.9% (2011: 18.9%). Excluding Alterian and
Language Weaver, Group operating margin was 15.7% (2011:
18.9%).
Cash flows from operating activities (after income tax paid)
were GBP17.5 million (2011: GBP32.6 million). Organic DSO was
stable and DSO for the acquired Alterian business has improved
since acquisition. Profit to cash conversion decreased, due to the
expected reduction in acquired Alterian creditors as overdue trade
balances were settled, deal transaction costs paid and deferred
income associated with old non-renewing customer contracts was not
replaced. Profit to cash conversion in the underlying business
excluding the non-recurring effects of the Alterian acquisition
remains strong. Cash flow from operations in the second half was
GBP18.8 million or a 125% conversion on PBTA. At the end of 2012 we
had net cash of GBP6.3 million on the balance sheet (2011: GBP70.4
million), comprising positive cash balances of GBP28.5 million
(2011: GBP70.4 million) and drawn credit facilities of GBP22.2
million (2011: GBPnil).
In SDL's trading statement of 26 November 2012, the Group
disclosed that it was taking a more cautious view of
percentage-of-completion and cost-to-complete of certain services
contracts in the second half of the financial year. Certain units
of the business were reviewed independently of operational
management. The adequacy and effectiveness of the internal control
systems were scrutinised. The findings were reported to the Board
and the Audit Committee. Following the review, certain financial
reporting lines have been changed and controls implemented to
reinforce and validate the existing process. These include staff
training, monitoring, measuring and reporting against the existing
framework of formal documented policies.
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