This segment comprises Desktop translation technologies,
Enterprise translation solutions and Machine Translation. Total
segment revenue saw a small decline, with a headline reduction of
1.7% due to foreign exchange effects, with a negligible decline in
the underlying business at constant currency. The business
continued its significant investment in cloud machine translation
technologies in 2012, to accelerate development and advance SDL's
leadership in this strategic space. Whilst gross margins grew to
84% (2011: 82%), additional investment together with selective
territory expansion in growth markets resulted in a reduced PBTA
margin for the year of 6.3%, down 6.8%. SDL remains committed to
leading the industry in enterprise statistical machine translation
and we plan to sustain continued high levels of investment in
research and development, sales and marketing and capital
expenditure into 2013.
Sales increased in all product areas with the exception of the
US Government, where weakness in the first half continued through
the remainder of 2012, due to continued uncertainty around the US
Federal budget. Software as a Service ("SaaS") sales continued to
increase as a proportion of total licence sales, a positive trend
that improves the revenue visibility of the business going
forward.
In January 2012 we launched a new integration between the SDL
Trados Studio desktop translation product and the SDL BeGlobal
cloud platform for machine translation. This has enabled 23,000
translators to leverage secure cloud based automated translations,
increasing their productivity and opening up new opportunities for
post-editing business.
We are proud to have won a People's Choice Stevie(R) Award for
SDL Studio Groupshare. This collaboration hub enables localisation
teams using SDL Trados Studio and SDL Multiterm to work across a
single platform, resulting in faster delivery with increased
quality and control. The Society for New Communications Research
Excellence (SNCR) has also honoured SDL with a Commendation of
Merit for SDL BeGlobal, acknowledging the key role SDL's leading
machine translation technology plays in the Language industry
space.
During the year we embarked on a programme to rationalise
Language Technologies research and development locations to two
core centres of excellence in the US and Europe. This ensures
future scalability by creating larger teams with improved access to
critical talent. We are also pleased to have expanded our academic
collaboration with a new machine translation research facility,
working with the Department of Engineering at the University of
Cambridge.
New clients in 2012 include Associated Press, ADP, Danish Oil
and Natural Gas and KONE. We are particularly pleased that SDL
Studio was selected by the European Union in December 2012, for a 5
year translation productivity tooling contract.
Language Services (contributing GBP151.0 million or 56% of
revenue to the group and GBP23.2 million or 65% of Group PBTA)
(2011: contributing GBP136.2 million or 59% of revenue to the group
and GBP25.5 million or 65% of group PBTA).
2012 was another year of very strong headline revenue growth of
10.8% for the segment, comprising 12.4% underlying growth at
constant currency and 1.6% loss on foreign exchange. This was
driven by strong performance in the United States where revenue
grew by 15%, and Asia where revenue grew by 28%. 40 new accounts
were added in Asia during the period, which are expected to
contribute to further growth in the region in 2013.
We have further invested in our global infrastructure in the
Americas, Asia and our low cost sourcing hubs to meet growing
demand. We also continue to grow our business in the Nordic region
and Latin America, realising the benefits of investments made last
year.
The segment PBTA margin declined to 15.4%, a decrease of 3.4%,
which reflects scaling investments, a more cautious view of
percentage-of-completion and cost-to-complete of certain services
contracts in the second half of the financial year and some large
US contracts with lower margins.
We have grown existing and new accounts during the year, with
the Language Services business benefitting from our Global Account
Management team that has worked closely with key clients,
identifying opportunities where SDL can add value to their
business. In particular, Consulting-led sales have enabled our
teams to work with clients' senior decision makers, to explore
their globalisation needs in greater depth and add more value by
packaging solutions to exactly meet their business needs. The
Consulting team will be expanded in 2013 within an independent
Customer Experience Management division that spans the whole range
of SDL solutions, with an initial focus on established major
accounts.
SDL's Intelligent Machine Translation (iMT) solution, which
integrates SDL's market-leading machine translation technology with
specialist human post-editing skills has proven very successful in
the year, with iMT penetration across the Language Services client
base increasing from 9% to 16%. By providing an even greater level
of localization automation, this unique technology-enabled service
allows our customers to increase their global communication for the
same cost, reduce like for like translation spend by up to 40%, and
accelerate time-to-market by decreasing production times by as much
as 50%.
New clients in 2012 include Barnes & Noble, SAE, Yokogawa
Electric and Husqvana.
Campaign Management, Analytics & Social Intelligence
(contributing GBP21.3 million or 8% of revenue to the group and a
break even position at a PBTA level) (not present in 2011
comparatives).
This segment comprises marketing analytics, campaign management
and social intelligence technologies, the main components of the
Alterian acquisition which completed on 27 January 2012.
The segment has continued to perform ahead of expectations. We
are pleased with the level of repeat business and new client wins
in particular where the proportion of direct sales has increased to
around one third. This approach brings correspondingly higher
margins and a reduced dependency on channel sales compared to the
operating model under former Alterian ownership.
Improved time to market for new product versions has reinforced
the division's reputation in the marketplace. A key element of the
products delivered in 2012 was an investment in customer
satisfaction which targeted service capability and technical
infrastructure. Operating synergies were realised through the
integration, funding this investment and a sustained increase in
research and development into 2013.
We are pleased to be acknowledged as a strong performer in the
Enterprise Listening Platforms Forrester Wave, and to have won the
Great Minds for Innovation Award given by the Advertising Research
Foundation.
Looking forward, this segment is a truly integral component of
SDL's Customer Experience Management proposition. We are very
pleased with the acquisition and its integration into SDL, in
particular with the cultural fit of the people and the exceptional
technology and see significant opportunity to both grow the
business and maximise the strategic positioning in the marketplace.
As we continue to invest in research and development and sales and
marketing, we expect this segment to be marginally profitable in
2013 improving as we move forward into 2014. New customers in 2012
include Land Rover, Majestic Wines Warehouse Limited and
Purina.
Gross Margin
The group's gross margin was 56%, a decrease from 58% in
2011.
The reduction was caused by a 4% decrease in Language Services
gross margin, that was partly offset by a greater proportion of
higher gross margin technology revenue, following the Alterian
acquisition.
Technology revenue as a percentage of group total revenue has
increased to 44% from 41% in 2011.
Administrative Expenses
In 2012, administrative costs excluding amortisation increased
to GBP115.8 million (2011: GBP94.2 million). Included in the
increase is GBP17.1 million of incremental cost for 11 months'
overheads of the acquired Alterian business, and GBP0.7 million of
one-off professional fees associated with the Alterian
acquisition.
Costs have increased organically by 4%, which compares to
organic revenue growth of 7% in the year. Cost increases in the
period relate to expansion in Asia, where revenue grew organically
by 24%, investment in research and development including machine
translation and content management technologies, and scaling up
sales and delivery resources in growth businesses.
Included within administrative expenses is a credit of GBP1.1
million (2011: charge of GBP2.9 million) relating to 2010, 2011 and
2012 Long Term Incentive awards and Option Scheme grants which will
not, or are not expected to, vest.
In addition we have added to the Trados shareholder litigation
provision during the year which has resulted in a profit and loss
charge of GBP1.5 million (2011: charge of GBP0.1 million).
Research and development expenditure of GBP21.8 million is
included in administrative expenses, a headline increase of 48%
from GBP14.8m in 2011. Of this increase, GBP4.9 million or 33%
related to the acquired Alterian business, which launched SDL
Campaign Manager 2012, SDL Customer Analytics 2012 and SDL SM2
2012. Excluding acquisition effects the business saw an organic
increase of 15% in research and development when SDL Fredhopper
2012, SDL Studio Groupshare 2012 and SDL Live Content 2012 were
launched.
Development costs have been reviewed, and the Board remains of
the opinion that capitalisation criteria under International
Accounting Standard (IAS) 38 are not met, and consequently no
development costs are capitalised on the balance sheet.
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