TIDMSDL
RNS Number : 7153V
SDL PLC
11 August 2020
11 August 2020
SDL plc
("SDL" or the "Group")
Half Year results for the six months ended 30 June 2020
Successfully executed business continuity plan delivered solid
results
SDL plc (LSE: SDL), the intelligent language and content
company, today announces its half year results for the six months
ended 30 June 2020.
Financial Highlights
Change
at constant
Unaudited Results 1H20 1H19 Change currency
Six months to 30 June GBPm GBPm
------ ------ ------- -------------
Revenue 180.7 182.5 (1%) (2%)
------ ------ ------- -------------
Operating profit 13.4 11.9 +13% +3%
------ ------ ------- -------------
Adjusted operating
profit (1) 16.3 16.1 +1% (6%)
------ ------ ------- -------------
Profit before tax 11.7 10.9 +7% (1%)
------ ------ ------- -------------
Basic earnings per
share 11.2p 8.9p +26%
------ ------ ------- -------------
Diluted earnings per
share 11.1p 8.7p +28%
------ ------ ------- -------------
Adjusted diluted earnings
per share (2) 11.7p 12.3p (5%)
------ ------ ------- -------------
(1) Adjusted operating profit: Operating profit before
amortisation of acquired intangibles and exceptional items (as
reconciled on the income statement)
(2) Adjusted earnings: Profit after tax before the impact of
exceptional items and amortisation of acquired
intangibles (as reconciled in note 7)
Highlights
-- Business continuity plans successfully executed in response
to COVID-19, enabling all employees to work from home safely and
remain productive. The substantial majority of employees continue
to work remotely. Focus continues to be on the protection and
wellbeing of employees, customers and supply chain
-- Sales mix shift as a result of COVID-19:
o Stronger Language Services revenues in sectors such as
corporate communications and Life Sciences offsetting weaker areas
such as Marketing Solutions, travel, leisure, manufacturing and
automotive
o Technology sales conversion in line with expectations, with
some softness in Translation Productivity offset by strong growth
(46%) in Machine Translation
-- Group adjusted operating profit increased 1% to GBP16.3m (1H19: GBP16.1m)
-- Language Services revenues declined 2% but gross margin
improved to 43.5% (1H19: 42.1%), reflecting the positive impact of
applying a range of delivery model improvements. Excluding
Marketing Solutions, which was adversely impacted by COVID-19,
Language Services revenues increased by 2% from GBP117.4m to
GBP120.1m
-- Language Technologies revenues on par with last year. Content
Technologies revenues up 2% on the prior year, with a number of new
customer wins in H1
-- On track to deliver cost reductions against budget of GBP8m,
as referred to in the 2019 full year results. Business operations
carefully managed during this challenging environment with no staff
furloughed
-- Operating cash conversion of 144% (1H19: 60%), benefiting
from improved cash management and timing of customer cash
receipts
-- Liquidity at 30 June 2020 of GBP98m, GBP35m in cash and
GBP63m available under revolving credit facility. Net cash
currently stands at c. GBP45m
-- Continued strong innovation activity across the technology
and solutions portfolio. Innovative "SLATE" smart translation
platform launched in first half; SDL Trados Live launched post
period; and launch of SDL Tridion Sites 9.5 planned for the second
half of year
-- Expanded the customer key account programme and sales
leadership skill-set and re-organised the global marketing function
to strengthen alignment with product management and to drive SDL's
digital go-to-market strategy
Outlook
-- Customer activity increasingly stabilised in May and June,
with some signs of more positive momentum beginning to build
-- SDL has a good pipeline for the second half, which
traditionally is its stronger period, but with a higher degree of
uncertainty than in normal years and the Group remains alert to
risks to customer spending and delays to sales cycles and
decision-making
-- The Board continues to assess the appropriate time to
reinstate dividends after its decision to suspend them in April
2020 and will reconsider reinstatement alongside the full year
results
Adolfo Hernandez, CEO of SDL plc, said:
"In challenging circumstances, we are pleased with the Group's
performance in the first half of the year. Crucially, we were able
to enact our business continuity plans swiftly, moving the entire
global workforce to working-from-home over a matter of weeks. As a
result, there was no material disruption in our ability to service
customers nor to our productivity. SDL remains operationally
resilient and well-capitalised, and its core strategic plans remain
on track. Looking to the second half, which is traditionally our
stronger period, although our pipeline is good, COVID-19 continues
to present a risk to trading patterns and software sales cycles.
However, we believe that the Group is positioned to take advantage
of the expected recovery in the global economy post COVID-19."
Enquiries
SDL plc 01628 410100
Adolfo Hernandez, CEO
Xenia Walters, CFO
Alexandra Jarvis, SVP
Luther Pendragon 0207 618 9100
Harry Chathli, Claire Norbury,
Alexis Gore
Analyst Presentation
Adolfo Hernandez, Chief Executive Officer, and Xenia Walters,
Chief Financial Officer, will be holding a conference call for
analysts and investors this morning at 9.00am BST. For dial-in
details, please contact Elliot Fradd at Luther Pendragon at
elliotfradd@luther.co.uk
About SDL
SDL (LSE: SDL) is the intelligent language and content company.
Our purpose is to enable global understanding, allowing
organizations to communicate with their audiences worldwide,
whatever the language, channel or touchpoint. We work with over
4,500 enterprise customers including 90 of the world's top brands
and the majority of the largest companies in our target sectors. We
help our customers overcome their content challenges of volume,
velocity, quality, fragmentation, compliance and understanding
through our unique combination of language services, language
technologies and content technologies.
Operational review
The first half was defined by unpredictable market conditions as
a result of the COVID-19 outbreak. As a result of the Group's
investments in IT infrastructure made in recent years, as well as
the rapid response to roll out its business continuity strategy
globally, SDL was able to continue to service its customers with
minimal disruption and the Group's results demonstrate that
customer activity levels remained broadly similar to last year.
While the mix of business shifted between customers and segments,
SDL's broad revenue base, including a significant proportion of
large enterprise customers, combined with low exposure to some of
the hardest hit sectors, contributed to a relatively stable revenue
performance overall.
SDL operational response to COVID-19
As regions and countries went into lockdown throughout January
to March, SDL rolled out its business continuity strategy globally,
and remained fully operational throughout the period. The ability
to move 4,500 employees to home-working was testament to the
investments in IT infrastructure made in recent years, but also
thanks to an incredible response from SDL's teams. Although some
colleagues have voluntarily returned to offices in certain
locations, the majority are expected to continue working from home
throughout the remainder of 2020. The Group has modified its
offices to keep employees safe and to comply with all social
distancing and local regulatory requirements.
SDL's sales teams have adapted quickly to the new selling
landscape. SDL's strategy has been to increase focus on stable or
growing segments of the market, cross-selling and account
development, and fast on-boarding of new wins, whilst also
continuing to support those customers with tightened budgets with
cost-saving approaches or new delivery models, including Business
Process Outsourcing (BPO) to enable customers to fill their
resourcing gaps. A highly customer-centric approach has been more
important than ever and has borne fruit in very positive customer
feedback about SDL's delivery during this period.
The commercial team structure was adapted to make it more
integrated and leaner, with shorter reporting lines to enable
faster decision-making whilst not to the detriment of control
resilience. As part of the sales evolution programme, the Group has
made improvements to processes, tools and training to help sales
teams move faster and focus on the right opportunities. Although,
like all companies, there is still plenty to be learnt about remote
selling models, the shift to more online sales, marketing and
events has been broadly successful.
Employee wellbeing has been a major focus in the first half and
significant efforts have been made to support colleagues in as many
ways possible. The employee survey conducted in May-June provided
feedback that 86% of employees feel supported by SDL.
Strategy execution update
Despite the significant operational response required to adapt
to COVID-19, SDL has continued to execute its core strategic
programmes at pace in the first half. Indeed, there has been strong
alignment between the strategic initiatives in progress and the
requirements of the new environment, from the evolution of the
go-to-market strategy to product innovation and operational
efficiency programmes.
SDL's product teams continued to deliver significant progress in
the first half and the innovation engine of the Group is now
firing. The 46% sales growth in Machine Translation was a notable
highlight of the period, underlining one of the important market
shifts underway in the industry. Having released SDL Language Cloud
last year, SDL is gaining good traction with its Translation
Management System offering and, furthermore, delivered two major
product releases powered by Language Cloud: SLATE and SDL Trados
Studio 2021. With an increased acceleration in cloud adoption and
SDL's cloud portfolio, cloud operations and infrastructure were
further strengthened in the period. Within the Content Technologies
segment, Tridion Sites 9.5 is due for release in the second half.
SDL has also begun to review options to accelerate development of
its Contenta Publishing Suite to meet identified emerging market
opportunities.
In addition to the cost controls described above, SDL has
continued its long-term operational efficiency programmes,
substantially focused on the automation of Language Services. These
actions have enabled SDL to meet changing customer demands for
higher velocity, small packet translation work, as well as increase
gross margin in the period despite slightly lower revenue. A
further development has been understanding the impact of working
from home on the Group's operational capability and workforce.
Although face-to-face collaboration remains important, it is the
Group's view that a substantially larger proportion of its
workforce can work from home in future - either full time or part
time. (Approximately 5% of SDL employees worked from home prior to
COVID-19). As a result, SDL has initiated a future real estate plan
that will right-size the Group property portfolio over the next
five years. The real estate plan is expected to result in a GBP3m
to GBP4m net annual cost saving by the end of 2025.
Market outlook and pipeline
SDL believes its reputation as a supplier is likely to have been
strengthened through its proven ability to deliver reliably
throughout the pandemic. Several of the key trends that SDL seeks
to address are also likely to accelerate, including adoption of
Machine Translation, cloud-based technologies, intelligent
processes (smart workflows, continuous localisation) and
pre-packaged solutions.
Customer activity increasingly stabilised in May and June, with
some signs of more positive momentum. SDL has a good pipeline for
the second half, particularly in its stronger sectors of High Tech
and Life Sciences. However, SDL remains alert to the risks of a
second wave impacting customer spending and causing delays to sales
cycles and decision-making, particularly with regard to higher
margin software sales. Longer term, it is the Group's view that the
market opportunity for SDL's products and services remains
attractive.
Although financial progress against the long-term plan of
achieving 15% adjusted operating margins will inevitably be
impacted in the current year, SDL remains confident in its strategy
and its ability to deliver its long-term financial goals once
markets stabilise further.
Segment performance and review
SDL helps customers create, translate and deliver content
globally, at scale, on time and at the right quality, by deploying
market-leading services, technologies and solutions.
Language Services Language Technologies Content Technologies
1H20 1H19 1H20 1H19 1H20 1H19
GBPm GBPm GBPm GBPm GBPm GBPm
Revenue 125.9 128.4 25.7 25.6 29.1 28.5
Gross Profit 54.7 54.0 19.6 20.0 20.1 20.0
Administrative
Expenses (43.7) (42.0) (14.7) (14.8) (13.5) (12.8)
Operating Profit
(note 2) 11.0 12.0 4.9 5.2 6.6 7.2
Gross Profit (%) 43.5% 42.1% 76.3% 78.1% 69.1% 70.2%
Operating Profit
(%) 8.7% 9.3% 18.9% 20.5% 22.7% 25.1%
Language Services
Language Services revenues reduced 2% in the period to GBP125.9m
(1H19: GBP128.4m). Gross profit improved to GBP54.7m, at a margin
of 43.5%, reflecting a range of delivery model improvement
programmes (1H19: GBP54.0m; 42.1%). Adjusted operating profit was
GBP11.0m (1H19: GBP12.0m) as the Group incurred business continuity
costs for the language services organisation as a result of
COVID-19.
Language Services Sales Performance
The Group's Regulated Industries practice (Financial Services,
Life Sciences and Legal) increased to GBP42.2m (1H19: GBP41.0m) and
Commercial Enterprise (non-regulated) increased to GBP77.9m (1H19:
GBP76.4m). Marketing Solutions revenue decreased to GBP5.8m (1H19:
GBP11.0m).
Volumes saw a shift in mix towards healthcare, online retail,
e-learning and corporate communications. In the period, SDL was
delighted to renew its master services agreement with its second
largest customer, which operates in the life sciences sector, for a
further three years. Conversely, activity reduced in the
hospitality and leisure sectors and there was greater
unpredictability in manufacturing and, to a lesser extent,
automotive sectors. Some delays were seen in projects related to
financial reporting, M&A transactions and litigation, although
there are now signs of a return in activity.
Lockdown activities impacted monthly seasonal dynamics, with
some timelines becoming more extended or events cancelled, offset
by large peaks of activity in March, as companies prepared for
lockdown and accelerated some programmes. SDL has seen some
normalisation in activity patterns through May and June and still
expects the second half for Language Services to be the seasonally
stronger period.
Language Services Operational Efficiency
In response to the pandemic, SDL was able to move the bulk of
the organisation to a work-from-home model in under a week. The
transformative work improving internal assets in recent years
enabled these to be accessed securely from anywhere in the world
using a simple browser, significantly reducing the complexity of
working from home. As a result, there was no significant
degradation in on-time delivery or quality to clients.
The Helix infrastructure, which is already cloud-based, also
supported this distributed way of working, and saw the highest
volume of addressable clients to date, with the overall addressable
volume rising to 90% by the end of the period. A further 66
customers were on-boarded to Helix, with 77% of all addressable
customers having more than 95% of their volume managed through
Helix. An increasing number of jobs now go straight to translation
without human intervention, providing quicker and more effective
delivery to customers.
A key feature of the first half was an acceleration of required
turnaround times and smaller per-job volumes, as customers sought
to reach their audiences faster and more regularly. SDL saw a
significant increase in ultra-fast turnaround work and 35% of all
jobs were below 100 words. Quick turn-around time workflows were
implemented for urgent requests for a number of large enterprises.
SDL's investments in automation have been critical to being able to
meet this new pattern.
In order to continue to drive efficiencies in managing these
jobs, additional automated functions were added to Helix to
streamline project financial tracking and integrate SDL Trados
GroupShare, reducing administrative effort in the language offices.
SDL's first clients supported by Language Cloud have also been
integrated into Helix to provide a seamless flow from their
organisation through to the Group's Translation Services and back.
Linguistic Productive Utilisation was maintained at 67%.
In the second half, the Group plans to focus on improving vendor
experience with updates to the WorkZone portal. In addition, SDL
continues to expand the Helix managed workflows to cover more of
its technical delivery teams and to integrate Language Cloud
further.
In addition, during the first half, a significant proportion of
the translation work of the acquired DLS business was moved to
in-house production. At the end of June, 80% of addressable
regulated industries content was insourced, with a positive impact
on external cost of sales for a partial period in the half and the
full programme (100% insourcing of the addressable volumes) is
expected to be concluded in the second half of the year.
Language Technologies
Language Technologies revenue was stable at GBP25.7m (1H19:
GBP25.6m). Gross profit was GBP19.6m (1H19: GBP20.0m) and adjusted
operating profit was slightly down at GBP4.9m (1H19: GBP5.2m) as a
result of the reduction in gross profit. Machine Translation
revenue grew by 46% year-on-year, whilst Translation Management
System revenue was down 1% and Translation Productivity revenue
contracted 14%. However, pre-sales of the new Trados product were
strong ahead of the second half launch.
SDL Language Cloud
One of the key design goals of SDL Language Cloud is that it
evolves to be a platform on which a range of software language
technology applications and solutions can be built. In the first
half of 2020, SDL not only continued to build out the capability of
SDL Language Cloud TMS (Translation Management System) but the
Group also released two new products - SLATE and SDL Trados Live
Team - both 'powered by' SDL Language Cloud. Both of these products
were developed in a relatively short timeframe and their release
acts as a proof-point for the platform credentials of SDL Language
Cloud. A further advantage of this approach ensures that all
products are developed under a single technology stack, meaning
that SDL's platform will provide a straightforward upsell to a more
sophisticated product as a client's maturity grows in terms of
technology need.
The continuous releases associated with SDL Language Cloud also
facilitates an agile approach to releasing innovation into the
products. Innovations of note in the first half of 2020
include:
-- Building the foundation for online/offline working where
translators have the ability and flexibility to work on projects
stored in the cloud in either the Online Editor (web browser based)
or SDL Trados Studio (desktop) translation environments.
-- The introduction of AI technology to help project managers
save time by automatically analysing content and suggesting
translators suitable for that content.
SDL Language Cloud TMS will continue to evolve in sophistication
and flexibility around the areas of reporting, translation quality
assessment and workflow design. Not only will this provide feature
parity with existing SDL TMS offerings, allowing clients to migrate
from SDL on-premise products to the SDL Language Cloud products, it
will also provide the framework for AI technology to introduce more
automation to the client solutions, such as automating some of the
translation quality assessment process and automating the selection
of workflows for specific content.
SDL continues to see a broader acceptance of cloud technology
amongst its customer base. Clients that would previously only
consider hosting SDL technology products behind their own firewall
are now willing to have SDL host those same products for them. With
the release of SDL Language Cloud, in addition to SDL hosting,
clients are starting to see the benefits of the continual release
nature of cloud products and the ease with which they can always be
on the latest version of the product.
SDL Trados
The first half was c ommercially challenging, with tough trading
conditions, particularly in China, Japan and some markets in EMEA.
Nonetheless the new products are starting to generate revenue
streams that offset the difficult market backdrop.
In the first half, SDL launched SDL Trados Live Team, a
cloud-based collaboration solution for translation departments and
translation agencies. In July, SDL released SDL Trados Studio 2021,
which combines the leading SDL Trados Studio with the cloud
capabilities of SDL Trados Live to drive flexibility and
productivity for users. The pre-launch phase saw strong uptake in
upgrades. This is a major new release of SDL's leading translation
technology product and is significant for two main reasons:
-- It introduces a new subscription-based payment option to the
existing perpetual licence payment options.
-- It allows users of SDL Trados Studio 2021 to create, store
and work on projects in the cloud via a native and seamless
integration with SDL Language Cloud.
Machine Translation
Sales of Machine Translation grew strongly in the period, with
continued growth across Government, Airline & Defence and
enterprise sectors across all regions. New OEM deals were struck
with Creative Radical and Reynen Court in the legal sector, which
has already led to a first deal with a leading law firm. Positive
trends supporting this growth include the increasing volume of
content to be translated, a focus on security and data privacy, and
customer reassessment of Machine Translation as an option in the
localisation mix as a result of the economic shock and business
disruption caused by the pandemic.
During the first half, the cadence of releases on the Cloud and
Edge platforms continued, and improvements were made to support
increasing traffic and auto-scaling for variable traffic patterns,
and constant improvements to existing Neural MT 2.0 language models
for better input handling and addressing new domains. A secondary
MT Cloud instance was deployed in the US to better serve the
Group's NASA customers and reduce latency. In the second half,
additional language and 'smart' features will be developed.
Content Technologies
Content Technologies revenue was broadly flat at GBP29.1m (1H19:
GBP28.5m). Gross profit was GBP20.1m (1H19: GBP20.0m). Adjusted
operating profit was GBP6.6m (1H19: GBP7.2m) as a result of
increased R&D spend on the release of Tridion Docs and the
future release of Tridion Sites.
SDL Tridion generated some significant licensing wins in the
first half for both Tridion Sites and Docs, and a number of major
renewals were secured. SDL Tridion is increasingly focusing on
differentiating within the content management space by
concentrating on the area of digital experience plus knowledge
management, a move that has resonated well with industry analysts
and customers. In the first half, SDL released "Collective Spaces",
a collaborative authoring tool which has been adopted by several
key customers. The partner ecosystem was further built out at an
accelerated pace, including a strategic partnership with Aprimo.
Adoption of the Tridion Cloud content-as-a-service offering also
accelerated amongst existing on-premise customers. In the second
half, SDL will release Tridion Sites 9.5, which will offer a
completely new intuitive user experience to increase usability and
user productivity.
Within the Contenta Publishing Suite, SDL released XPP 9.4 as
part of a continued progression to cloud and including enhanced
user experience. In the second half, SDL will introduce new
features to its Contenta S1000D product. Contenta continued to
build its strong foothold and expansion with the US Department of
Defense agencies and contractors.
Financial review
This report provides alternative performance measures (APMs)
which are not defined or specified under the requirements of the
International Financial Reporting Standards (IFRS). The Group uses
these APMs to improve the comparability of information between
reporting periods and division, by adjusting for certain items
which impact upon IFRS measures, to aid the user in understanding
the activity taking place across the Group's businesses. APMs are
used by the Directors and Management for performance analysis,
planning, reporting and incentive purposes. A summary of APMs are
included in the Appendix below.
Revenue
Reported growth
----------------------- ------ ------
1H20 1H19 At actual At constant
GBPm GBPm Rates currency
------ ------ ---------- ------------
Language Services 125.9 128.4 (1.9%) (2.9%)
------ ------ ---------- ------------
Language Technologies 25.7 25.6 0.4% (0.4%)
------ ------ ---------- ------------
Content Technologies 29.1 28.5 2.1% 0.4%
------ ------ ---------- ------------
Group 180.7 182.5 (1.0%) (2.0%)
------ ------ ---------- ------------
Group revenue in 1H20 was GBP180.7m, a decrease of 1.0% on a
reported basis and 2.0% on a constant currency basis. The decrease
arose in the Language Services segment as a result of the impact of
COVID-19 on certain sectors, and was partially offset by new deals
in the Language Technologies and Content Technologies segments.
There were marked regional differences in the period, albeit
reflecting SDL's specific customer and sector exposure in those
markets. Revenues in APAC reduced by 23.8%, largely driven by a key
customer in the Marketing Solutions area that had experienced
material volume declines as a result of COVID-19. EMEA revenues
increased by 2.1% year-on-year, with segmental exposure in
manufacturing, retail, travel and automotive being offset by
increasing revenues in Life Sciences, Aerospace & Defence and
Government. NASA revenues increased by 3.8%, driven by customers
within the High Tech and Life Sciences sectors. SDL's largest
customer (which is within the High Tech sector) performed strongly,
and new services agreements were put in place with two other major
technology companies.
SDL measures Annual Recurring Contract Value ("ARCV"), which
includes the amount of revenue recognised in the last month of the
reporting period, annualised and generated from technology-related
subscription contracts (SaaS, hosting and support and maintenance)
and term contracts cash flows arising from term licence fees. In
1H20, ARCV was GBP76.5m, which represents a 7.1% increase on
1H19.
Gross profit
Gross profit increased by GBP0.4m to GBP94.4m representing a
gross profit margin of 52.2% (1H19: 51.5%). This margin improvement
is as a result of the investment in the Language Services
automation process and the impact of a reduction in variable
compensation.
Gross profit margin within the Group's largest division,
Language Services, improved from 42.1% to 43.5%. The year-on-year
improvement reflects the continued adoption and improvements of the
Group's business process automation platform (Helix), optimisation
of SDL's resourcing model, continued strong usage of machine
translation and improved process controls.
The Group has increased its internal translation headcount by
110 heads to 1,535 from December 19 and maintained Linguistic
Productive Utilisation at 67%.
Gross profit margin within Language Technologies contracted by
1.7% to 76.4% (1H19: 78.1%) and Content Technologies gross margin
reduced from 70.2% to 69.1%. The margin variation is driven by the
mix of revenues between SaaS, perpetual and term licenses and
recurring support and maintenance revenues.
Adjusted administrative expenses
Adjusted administrative expenses increased by GBP0.2m to
GBP78.1m. These expenses exclude the impact of exceptional items
(GBP1.3m) and acquisition-related amortisation (GBP1.6m). Statutory
administrative expenses were GBP81.0m (1H19: GBP82.1m). Adjusted
administrative expenses as a percentage of revenue were 43.2%
(1H19: 42.7%) and reflect the investment in business continuity
costs in H1. Staff costs make up a large proportion of the cost
base, accounting for approximately 71.3% of total administrative
expenses.
The Group is executing phase 1 of its cost reduction plan to
partially offset reduced revenues. This will have the impact of
reducing costs (within cost of sales and administrative expenses)
by approximately GBP8m compared with budget, through a combination
of cost avoidance and tighter control of discretionary spend.
During the first half, SDL invested in the delivery of SLATE -
SDL's online translation on demand platform that is based on SDL
Language Cloud - and further business continuity tooling such as
VPN licences and a Virtual Desktop Infrastructure to aid SDL
employees in working from home.
The Group continues to review administrative costs and has
completed a review of the Group's cost base. As a result, SDL has
initiated a future real estate plan that will right-size the
Group's property portfolio over the next five years, which will
yield a GBP3m to GBP4m net annual cost saving by the end of
2025.
Exceptional costs in the first half were GBP1.3m of which
GBP1.2m related to restructuring costs. These restructuring costs
include the exit of certain legacy teams after identifying further
synergies and integration opportunities as a result of the
acquisition of DLS.
Adjusted operating profit
Adjusted operating profit and margin was GBP16.3m (1H19:
GBP16.1m) and 9.0% (1H19: 8.8%), and is before exceptional items of
GBP1.3m and amortisation of acquired intangibles of GBP1.6m.
The Group achieved a statutory operating profit in the period of
GBP13.4m (1H19: GBP11.9m).
Taxation
The 1H20 tax charge was GBP1.5m (1H19: GBP2.9m) and represents a
reported effective tax rate of 12.8% (1H19: 26.6%). The adjusted
effective tax rate was 26.0% (1H19: 24.5%). The adjusted effective
tax rate excludes the impact of exceptional items, amortisation of
acquisition-related intangibles and exceptional tax credits.
Following a review of the DLS acquisition accounting, the
deferred tax liability in respect of US assets has been remeasured
to reflect management's best estimate of the US tax base, taking
into account all currently available information. This has resulted
in an exceptional tax credit of GBP1.6m, which is excluded from the
adjusted effective tax rate.
Tax cash paid in 1H20 was GBP1.3m (1H19: GBP3.5m) with total tax
cash paid in 2020 expected to be in the region of GBP4-5m.
The Group's adjusted effective tax rate going forward is
expected to be in the region of 25% to 27%. The rate is higher than
the effective UK rate principally due to the impact of higher tax
rates in overseas countries and to a lesser extent disallowable
expenditure. There are some countries in which the tax rate is
lower than the UK, but the impact is small either because the
countries are not significant contributors to Group profit, or the
tax rate difference is not significant.
Earnings per share
Basic EPS was 11.2p, a 25.8% increase on the prior year,
reflecting underlying profit growth, a reduction in exceptional
costs and a lower reported tax charge. Adjusted diluted EPS reduced
by 4.9% on the prior period to 11.7p mainly due to the exclusion of
the GBP1.6m exceptional tax credit from adjusted profit after tax
earnings.
Cash flow, funding and net cash
Cash flow in the first half was strong with adjusted operating
cash flow of GBP23.4m (1H19: GBP9.6m) and operating cash conversion
of 144% (1H19: 60%). Adjusted operating cash flow is calculated as
adjusted operating profit (GBP16.3m), depreciation and amortisation
from non-acquired intangibles (GBP9.0m), share-based payments
(GBP0.8m) and net changes in working capital (GBP2.7m). The Group
has reduced its trade receivables over 90 days from GBP4.3m at 31
December 2019 to GBP2.3m as at 30 June 2020 and improved Days'
sales outstanding ('DSO') to 53 days.
Total capital expenditure of GBP6.9m includes payments for
maintenance capital expenditure (GBP1.1m), capitalised development
costs (GBP4.2m) and investment capital expenditure (GBP1.6m).
The cash impact of exceptional items amounted to GBP1.3m (1H19:
GBP2.0m). As disclosed in the 2019 Annual Report, the Directors did
not recommend the payment of a final dividend in light of the
uncertainty created by the COVID-19 pandemic (1H19: Final dividend
of GBP6.3m).
The Group's gross cash balances at 30 June 2020 amounted to
GBP35.1m with external borrowings of GBPNil (31 December 2019:
GBP26.3m cash and no external borrowings; 30 June 2019: GBP13.1m
cash and GBP12.0m of external borrowings).
Balance sheet and working capital
Net assets at 30 June 2020 increased to GBP276.8m (31 December
2019: GBP252.5m) reflecting the growth in the business and the
impact of foreign exchange rates on the Group's intangible assets.
The net impact on the balance sheet of foreign exchange translation
was an increase of GBP15.1m.
Trade and other receivables decreased by GBP1.8m to GBP99.8m (31
December 2019: GBP101.6m). DSO calculation reflects the number of
days' billing in debtors. DSO decreased to 53 days (31 December
2019: 55 days).
Current trade and other payables of GBP87.3m (31 December 2019:
GBP92.5m) includes deferred income of GBP38.2m (31 December 2019:
GBP37.7m). Accruals of GBP32.5m (31 December 2019: GBP39.4m) were
lower than the year end due to reduced accruals for current
variable compensation plans and lower spend and therefore accruals
in relation to marketing events and T & E spend.
Treasury and financing
SDL manages its financing and tax planning activities centrally
to ensure that the Group has an appropriate structure to support
its geographically diverse business. It has clearly defined
policies and procedures with any substantial changes to the
financial structure of the Group, or to its treasury practice,
referred to the Board for approval. The Group operates strict
controls over all treasury transactions. The Group does not hedge
against forecast future foreign currency transactions or the
translation of its foreign currency profits and its results are
therefore impacted by movements in exchange rates. The average
rates used to translate the consolidated income statement are as
follows:
Average exchange rates 1H20 1H19
Euro (EUR) 1.14 1.15
----- -----
US Dollar ($) 1.26 1.30
----- -----
Foreign exchange had a favourable impact on the Group's results
for the year. The Group's results on a constant currency basis are
included within the operational review.
The principal exposures of the Group are to the US Dollar and
Euro with approximately 50% of the Group's revenue being
attributable to the US Dollar and 25% of Group costs being Euro
denominated.
A portion of the Group's foreign currency net assets are
naturally hedged using the Group's multi-currency borrowing
facilities.
The Group's debt is sourced from a GBP120m syndicated
multi-currency Revolving Credit Facility ('RCF') of which GBP70m is
committed. The remaining balance relates to a GBP50m uncommitted
accordion facility and expires on 17 July 2023. Borrowings drawn
down under the RCF are currently subject to interest at 1.15% over
LIBOR.
The Group also holds a GBP1m unsecured overdraft facility.
Borrowings on this facility are subject to interest at 1.75% over
base rate and are repayable on demand.
The Group was in compliance with the financial covenants of its
facilities at 30 June 2020 and throughout the period.
Capital structure
The Board believes in maintaining an efficient but prudent
capital structure, whilst retaining the flexibility to make
value-enhancing acquisitions. The Board's main strategic priority
remains organic growth, supported by targeted bolt-on
acquisitions.
Brexit impact
The Group operates in a range of end-user markets that may be
affected by Brexit developments in the future. Although the outcome
of Brexit is difficult to quantify, SDL does not expect the direct
consequences of Brexit to have a material impact on the Group.
However, there may be other legal, regulatory and commercial
ramifications, the likely impact of which are difficult to measure
until a final trade agreement is in place between the UK and the
EU.
SDL has a Brexit steering group that monitors developments and
pays attention to any emerging details relating to changes required
by virtue of the UK leaving the EU. The Group is aware that a
number of areas will change irrespective of the outcome of
negotiations and a number of tax impacts fall into this category.
SDL's tax team is reviewing Brexit implications to make sure that
tax impacts are integrated into business decision making. Due to
the Group's diversified geographical footprint, and the
characteristics of the industry sectors in which the Group
operates, SDL believes it is well positioned to manage any negative
impact.
Going Concern Statement
Performance to date during COVID-19 has been discussed in the
operational review above, which was considered in the preparation
of forecasts for the purposes of going concern. Further details are
provided within the basis of preparation in note 1 to the financial
statements.
The Directors have considered the impact of COVID-19 in
assessing whether the Group has adequate resources to continue in
operational existence for the foreseeable future. The Directors
have reviewed the current liquidity of the Group, the impact of
COVID-19 on the budgets and forecasts that have been prepared
across a number of scenarios and the impact on the Group's banking
covenants.
The Group had cash in excess of GBP45m at the date of signing,
and had not drawn down on its revolving credit facility. The
Directors have considered the mitigating actions which would be
taken in the event of a material deterioration in the Group's
trading and consider that it could take appropriate steps to ensure
that the Group has adequate resources to continue in operational
existence.
The Group has a GBP70m committed revolving credit facility (RCF)
with HSBC and Lloyds, expiring in July 2023.The agreement also
includes a GBP50m uncommitted accordion facility. The Group's
borrowings as at 30 June 2020 were GBPNil (1H19: GBP12.0m).
After reviewing performance in 2020, the Group's budget,
forecasts and three year plans (to 2022), the Directors have a
reasonable expectation that the Group has adequate resources to
continue in operational existence for a period of at least 12
months from the date of this report. Given this expectation they
have continued to adopt the going concern basis in preparing the
financial statements.
Further information is provided in note 1 of the financial
statements.
Principal risks and uncertainties
The principal risks and uncertainties were disclosed in the
Group's annual report and financial statements for the year ended
31 December 2019 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.
Cautionary statement
Certain statements in this interim management report constitute,
or may be deemed to constitute, forward-looking statements
(including beliefs or opinions). Any statement in this interim
management report that is not a statement of historical fact
including, without limitation those regarding the Group's future
expectations, operations, financial performance, financial
condition and business, is a forward-looking statement. Such
forward-looking statements are subject to risks and uncertainties
that may cause actual results to differ materially. These risk and
uncertainties include, among other factors, changing economic
financial, business or other market conditions. These and other
factors could adversely affect the outcome and financial effects of
the plans and events described in this results announcement. As a
result, you are cautioned not to place reliance on such
forward-looking statements.
Except as is required by the Listing Rules, Disclosure and
Transparency Rules and applicable laws, no undertaking is given to
update the forward-looking statements contained in this interim
management report, whether as a result of new information, future
events or otherwise.
Nothing in this interim management report should be construed as
a profit forecast. This interim management report has been prepared
for the Group as a whole and therefore gives greater emphasis to
those matters which are significant to SDL plc and its subsidiary
undertakings when viewed as whole.
This announcement is released by SDL plc and contains inside
information for the purposes of Article 7 of the Market Abuse
Regulation (EU) 596/2014 ("MAR"), encompassing information relating
to trading for the Group's expected results for the financial year
ending 31 December 2020, and is disclosed in accordance with the
Group's obligations under Article 17 of MAR.
SDL plc
Condensed Consolidated Income Statement
Unaudited Unaudited
six months six months to
to 30 June 2019
30 June
2020
Notes GBPm GBPm
Revenue 2 180.7 182.5
Cost of sales (86.3) (88.5 )
------------ ---------------
Gross profit 94.4 94.0
Administrative expenses (81.0) ( 82.1 )
------------ ---------------
Operating profit 3 13.4 11.9
------------ ---------------
Operating profit before exceptional items and amortisation of acquired
intangibles 16.3 16.1
Exceptional items 4 (1.3) (2.1)
Amortisation of acquired intangibles 3 (1.6) (2.1)
Operating profit 13.4 11.9
------------------------------------------------------------------------------- ------ ------------ ---------------
Finance expense 5 (1.7) (1.0)
Profit before tax 11.7 10.9
Tax expense (including an exceptional tax credit of GBP1.6m; 2019: GBPNil) 6 (1.5) ( 2.9 )
------------
Profit for the period attributable to the equity holders of the Parent
Company 10.2 8.0
------------ ---------------
Earnings per share
Basic 7 11.2p 8.9p
------------ ---------------
Diluted 7 11.1p 8.7p
------------ ---------------
SDL plc
Condensed Consolidated Statement of Comprehensive Income
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Profit for the period 10.2 8.0
------------ ------------
Other comprehensive income / (expense):
Items that may be reclassified subsequently
to profit or loss:
Currency translation differences on foreign
operations 15.1 (1.1)
Currency translation differences on foreign
currency equity loans to foreign subsidiaries
(net of deferred tax) (2.0) (0.3)
Other comprehensive income / (expense) 13.1 (1.4)
------------ ------------
Total comprehensive income 23.3 6.6
------------ ------------
Total comprehensive income is attributable to equity holders of
the parent company.
SDL plc
Condensed Consolidated Statement of Financial Position
Unaudited Unaudited Audited
30 June 30 June 31 December
2020 2019 2019
Notes GBPm GBPm GBPm
Assets
Non-current assets
Intangible assets 9 226.4 221.7 215.2
Property, plant and equipment 12.3 10.0 11.0
Right of use asset 32.4 19.8 29.5
Deferred tax assets 6.2 8.0 7.0
Non-current tax assets 3.1 - 3.1
Other receivables 2.7 2.7 2.6
Capitalised contract costs 0.6 0.9 0.6
283.7 263.1 269.0
---------- ---------- -------------
Current assets
Trade and other receivables 99.8 118.1 101.6
Capitalised contract costs 2.1 1.9 2.1
Tax assets 4.1 6.6 4.3
Cash and cash equivalents 35.1 13.1 26.3
141.1 139.7 134.3
---------- ---------- -------------
Total assets 424.8 402.8 403.3
---------- ---------- -------------
Liabilities
Current liabilities
Trade and other payables (87.3) (99.8) (92.5)
Lease liabilities (9.1) (3.8) (7.6)
Current tax liabilities (5.7) ( 10.1 ) (6.8)
Provisions - (0.5 ) (0.2)
(102.1) (114.2 ) (107.1)
---------- ---------- -------------
Non-current liabilities
Trade and other payables (2.0) ( 0.7 ) (1.9)
Lease liabilities (26.8) (16.6) (24.4)
Borrowings 10 - (12.0) -
Deferred tax liabilities (7.3) (8.3) (8.0)
Non-current tax liabilities (4.5) - (4.3)
Provisions (5.3) ( 3.6 ) (5.1)
---------- ---------- -------------
(45.9) ( 41.2 ) ( 43.7 )
---------- ---------- -------------
( 155.4
Total liabilities (148.0) ) (150.8 )
---------- ---------- -------------
Net assets 276.8 247.4 252.5
---------- ---------- -------------
Equity
Share capital 0.9 0.9 0.9
Share premium 136.9 136.0 136.8
Retained earnings 105.6 82.5 94.5
Translation reserve 33.4 28.0 20.3
---------- ---------- -------------
Total equity attributable
to equity holders of the
Parent Company 276.8 247.4 252.5
---------- ---------- -------------
The Interim Financial Information presented in this interim
report was approved by the Board of Directors on 10 August 2020
.
SDL plc
Condensed Consolidated Statement of Changes in Equity
Share Share Retained
Capital Premium Earnings Translation Reserve Total
GBPm GBPm GBPm GBPm GBPm
At 31 December 2018
(audited) 0.9 136.0 79.3 29.4 245.6
Profit for the period - - 8.0 - 8.0
Other comprehensive income - - - ( 1.4 ) ( 1.4 )
-------- -------- --------- ------------------- -------
Total comprehensive income - - 8.0 ( 1.4 ) 6.6
Dividend paid - - (6.3) - (6.3)
Share-based payments expense* - - 1.6 - 1.6
Share-based payments deferred tax* - - (0.1) - (0.1)
Arising on share issues* - - - - -
At 30 June 2019 (unaudited) 0.9 136.0 82.5 28.0 247.4
-------- -------- --------- ------------------- -------
Profit for the period - - 11.6 - 11.6
Other comprehensive income - - - (7.7) (7.7)
-------- -------- --------- ------------------- -------
Total comprehensive income - - 11.6 (7.7) 3.9
Share-based payments expense* - - 0.8 - 0.8
Share-based payments deferred tax* - - - - -
Arising on share issues* - 0.8 - - 0.8
Adjustments on transition to IFRS16 - - (0.4) - (0.4)
At 31 December 2019 (audited) 0.9 136.8 94.5 20.3 252.5
-------- -------- --------- ------------------- -------
Profit for the period - - 10.2 - 10.2
Other comprehensive income - - - 13.1 13.1
-------- -------- --------- ------------------- -------
Total comprehensive income - - 10.2 13.1 23.3
Dividend paid - - - - -
Share-based payments expense* - - 0.8 - 0.8
Share-based payments deferred tax * - - 0.1 - 0.1
Arising on share issues* - 0.1 - - 0.1
At 30 June 2020 (unaudited) 0.9 136.9 105.6 33.4 276.8
-------- -------- --------- ------------------- -------
*These amounts relate to transactions with owners of the Group
recognised directly in equity. The amounts above are attributable
to the equity of the parent company.
SDL plc
Condensed Consolidated Statement of Cash Flows
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Profit for the period 10.2 8.0
Tax expense 1.5 2.9
Profit before tax 11.7 10.9
Adjustments for:
Depreciation of property, plant and equipment 1.9 2.2
Depreciation of right of use assets 3.8 2.5
Amortisation of intangible assets 4.8 4.4
Share-based payment expense 0.8 1.6
Interest expense 1.7 1.0
Exchange differences (1.4) (0.5)
CASH GENERATED FROM OPERATIONS BEFORE
WORKING CAPITAL AND PROVISIONS 23.3 22.1
Decrease / (Increase) in trade and other
receivables 2.7 (9.4)
(Decrease) in trade and other payables
and provisions (5.4) (5.7)
CASH GENERATED FROM OPERATIONS 20.6 7.0
Income tax paid (1.3) (3.5)
NET CASH FLOWS GENERATED FROM OPERATING
ACTIVITIES 19.3 3.5
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of intangible assets (5.8) (4.8)
Payments to acquire property, plant and
equipment (1.1) ( 0.5 )
NET CASH FLOWS USED IN INVESTING ACTIVITIES (6.9) ( 5.3 )
SDL plc
Condensed Consolidated Statement of Cash Flows (continued)
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
FINANCING ACTIVITIES
Net proceeds from borrowings 63.0 6.6
Repayment of borrowings (63.0) -
Interest paid (0.4) (0.7)
Lease liabilities paid (3.9) (3.8)
Net proceeds from issue of ordinary share
capital 0.1 -
Dividend paid on ordinary shares - (6.3)
NET CASH FLOWS USED IN FINANCING ACTIVITIES (4.2) (4.2)
------------ ------------
INCREASE / (DECREASE) IN CASH AND CASH
EQUIVALENTS 8.2 (6.0)
------------ ------------
MOVEMENT IN CASH AND CASH EQUIVALENTS
Cash and cash equivalents at start of
the period 26.3 19.8
Increase / (decrease) in cash and cash
equivalents 8.2 (6.0)
Effect of exchange rates on cash and cash
equivalents 0.6 (0.7 )
Cash and cash equivalents at end of the
period 35.1 13.1
------------ ------------
SDL plc
Notes to the Half year Condensed Consolidated Financial
Statements
1. General Information, basis of preparation and accounting policies
The half year condensed consolidated financial statements do not
constitute statutory accounts within the meaning of Section 434 of
the Companies Act 2006. The statutory accounts for the year ended
31 December 2019 were approved by the Board of Directors on 14
April 2020 and have been delivered to the Registrar of Companies.
The auditor's report on those accounts was unqualified, did not
draw attention to any matters by way of emphasis and did not
contain a statement made under Section 498(2) or (3) of the
Companies Act 2006.
The half year condensed consolidated financial statements have
been reviewed, not audited, by the Group's auditor pursuant to the
Auditing Practices Board guidance on Review of Interim Financial
Information. A copy of their review report is included at the end
of this report.
The half year condensed consolidated financial statements for
the period ended 30 June 2020 were approved by the Directors on 10
August 2020.
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 2020 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 Group's published consolidated financial statements for the
year ended 31 December 2019.
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.
Going Concern
The financial statements have been prepared on the going concern
basis.
At 30 June 2020, the Group had cash of GBP35.1m and had no
borrowings on any of its borrowing facilities. In addition, the
Group has in place a five-year GBP120m revolving credit facility
(RCF), expiring on 19 July 2023, of which GBP70m is committed. The
agreement also includes a GBP50m accordion (uncommitted) facility.
This facility is provided by HSBC and Lloyds and is subject to
covenants that, if breached, would result in the facility becoming
repayable on demand.
Performance to date during COVID-19 has been discussed in the
operational review above, which was considered in the preparation
of forecasts for the purposes of going concern.
In March 2020, the Directors drew down a total of GBP63m of the
Group's bank facility to ensure continued liquidity in the face of
any potential banking crisis and potential unforeseen liquidity
issues as a result of COVID-19. This amount has been fully repaid
within the period to 30 June 2020.
The Group has a resilient balance sheet position, with net
assets of GBP276.8m at 30 June 2020, having made a profit for the
period of GBP10.2m and generated cash from operations of GBP20.6m
for the period then ended.
The business continuity plans actioned by the Group to date have
resulted in operations continuing unaffected on a remote working
basis but with the possibility of a reduction in revenues in the
current year as a result of the uncertain macro-economic
environment caused by the COVID-19 pandemic depending on the shape
of the forecast economic recovery.
The Directors have prepared cash flow forecast scenarios for a
minimum period of 12 months that, could arise if revenues were to
reduce compared to the expectations set at the year end. This
includes a downside scenario of a revenue decline of 5% for a
period of six months which the Directors consider to be a severe
but plausible scenario. All revenue reduction modelling is
accompanied by a multi-phased cost reduction plan. The first phase
of cost controls totalling GBP8.0m is already in progress and
includes a combination of actions including prioritisation of
insourcing to reduce linguistic outsourcing costs, a deferral of
the annual inflationary pay rise across the Group, restriction on
new hires and tight control of discretionary spend. The Group has
access to a number of alternative measures should results be behind
the severe but plausible downside. The Directors have more
extensive cost cutting actions open to them, such as additional
measures to reduce salary costs and the use of government's support
schemes, but do not believe at this time that these would need to
be implemented.
The global requirement for working from home automatically
results in additional cost savings in respect of travel and
entertainment.
The Group's forecasts and projections, taking account reasonably
possible changes in trading performance and the market uncertainty
generated by the financial impact of COVID-19, show that the Group
should be able to operate within the level of its current committed
facilities, With this in mind, the Directors have a reasonable
expectation that the Group has adequate resources to continue in
operational existence for the foreseeable future. They continue to
adopt the going concern basis in preparing these condensed
consolidated interim financial statements.
Critical Accounting Estimates and Judgments
The preparation of these condensed consolidated interim
financial statements requires management to exercise judgement in
applying the Group's accounting policies. It also requires the use
of estimates and assumptions that affect the reported amounts of
assets, liabilities, income and expenses. The actual future
outcomes may differ from these estimates and give rise to material
adjustments to the reported results and financial position of the
Group. Estimates and underlying assumptions are reviewed on an
ongoing basis, with revisions recognised in the year in which the
estimates are revised and in any future periods affected.
The Group's significant estimates and judgements noted below are
consistent with those as disclosed in the financial statements for
the year ending 31 December 2019. These are:
Significant areas of judgement:
-- The allocation of transaction price to the identified
performance obligations within the Group's contracts containing
multi-element arrangements (note 2),
-- The eligibility of the Group's R&D expenditure for
capitalisation under IAS38 Intangible Assets (note 3 and 9).
Areas of estimation uncertainty:
-- Value in use estimation for the Group's Cash Generating Units ('CGUs'),
-- Interpretation of applicable tax legislation and the
recoverability of the Group's resulting deferred tax assets.
2. Segment information and revenue disclosures
For internal management reporting purposes, the operating
segments are determined by product and service groupings and
referred to as divisions. The Group's operating segments are:
- Language Services
- Language Technologies
- Content Technologies
Segment profits represent the profit earned by each segment
without allocation of central administration costs which are
presented as a separate line below segment profit. This is the
measure reported to the Board (Chief Operating Decision Maker) for
the purposes of resource allocation and assessment of segment
performance. Transfer prices between segments are set on an arm's
length basis in a manner similar to transactions with third
parties.
Six months ended 30 June 2020 (unaudited)
Segment profit
before taxation,
acquisition related
External amortisation and
Revenue exceptionals
GBPm GBPm
Language Services 125.9 11.0
Language Technologies 25.7 4.9
Content Technologies 29.1 6.6
--------- ---------------------
Total 180.7 22.5
---------
Corporate costs (6.2)
Group adjusted operating
profit 16.3
Exceptional items (1.3)
Acquisition related amortisation (1.6)
Operating profit 13.4
Interest (1.7)
---------------------
Profit before taxation 11.7
=====================
Six months ended 30 June 2019 (unaudited)
Segment profit
before taxation,
acquisition related
External amortisation and
Revenue exceptionals
GBPm GBPm
Language Services 128.4 12.0
Language Technologies 25.6 5.2
Content Technologies 28.5 7.2
--------- ---------------------
Total 182.5 24.4
---------
Corporate costs (8.3)
Group adjusted operating
profit 16.1
Exceptional items (2.1)
Acquisition related amortisation (2.1)
Operating profit 11.9
Interest (1.0)
Profit before taxation 10.9
=====================
Revenue by geographical destination was as follows:
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
United Kingdom 21.2 20.7
Rest of Europe, Middle East and
Africa (exc.UK) 52.2 51.2
USA 78.4 75.7
NASA (excluding USA) 8.1 7.6
APAC 20.8 27.3
180.7 182.5
------------ ------------
Revenue by type was as follows:
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Language services 125.9 128.2
Professional services 7.6 7.9
License revenue 23.0 23.1
Hosting services 1.8 1.5
Support and maintenance 22.4 21.8
Total Revenue 180.7 182.5
------------ ------------
Goods and services transferred
at a point in time 13.5 14.1
Goods and services transferred
over time 167.2 168.4
------------ ------------
Total Revenue 180.7 182.5
------------ ------------
Contract Balances
The following table provides information on the contract assets
and liabilities from revenue contracts with customers:
Unaudited Unaudited
30 June 30 June
2020 2019
GBPm GBPm
Receivables which are included in 'Trade
and other receivables' 72.4 79.4
Contract assets included in 'Accrued income' 15.8 27.2
Contract liabilities included in 'Deferred
income' (38.2) (39.9)
The Group's revenue contracts with customers vary depending on
the nature of the performance obligations included. The Group's
contracts for language and professional services are typically
short term contracts with a duration of less than one year.
Contracts for license revenue, hosting services and support and
maintenance vary but are typically between one year and three years
in duration.
3. Operating profit
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Is stated after charging / (crediting):
Research and development expenditure 14.3 10.3
Provision for trade receivables 0.3 (0.3)
Depreciation of property, plant and equipment 1.9 2.2
Depreciation of right-of-use asset 3.8 2.5
Amortisation of acquired intangible assets
(note 9) 1.6 2.1
Amortisation of internally generated
intangibles (note 9) 3.2 2.3
Lease rentals for plant and machinery 0.2 0.1
Lease rentals for land and buildings 0.8 1.4
Net foreign exchange (gains) / losses (1.4) (0.5)
Share-based payment charge 0.8 1.6
------------ ------------
4. Exceptional items
Exceptional items are items of financial performance which the
Group believes should be separately identified on the face of the
income statement to assist in understanding the underlying
financial performance achieved by the Group.
The Group separately reports the cost of restructuring
programmes, acquisition and disposal costs and other exceptional
items along with their related tax effect as exceptional items:
Unaudited Unaudited
six months to six months to
30 June 2020 30 June 2019
Pre-tax Tax impact Total Pre-tax Tax impact Total
GBPm GBPm GBPm GBPm GBPm GBPm
Restructuring costs 1.2 (0.3) 0.9 1.7 (0.4) 1.3
Acquisition related
costs - - - 0.4 - 0.4
Other exceptional
items 0.1 - 0.1 - - -
-------- ----------- ------ -------- ----------- ------
1.3 (0.3) 1.0 2.1 (0.4) 1.7
-------- ----------- ------ -------- ----------- ------
The cash flows arising on the exceptional items pre-tax included
above are materially the same as their value in the income
statement above.
Restructuring costs
Restructuring costs relate to the costs of organisational change
associated with the Group's transformation programme. Normal
trading redundancy costs are charged to the income statement as
incurred. The results of cost savings will be shown within
operating profit.
These restructuring costs include identifying further synergies
and integration opportunities as a result of the acquisition of DLS
and the exit of certain legacy teams.
Acquisition related costs
There were no acquisition related costs incurred in 1H20 which
meet the Group's definition for recognition as an exceptional
item.
In 1Y19, acquisition related costs of GBP0.4m included
acquisition-related integration costs and the settlement of
indemnity claims made subsequent to the re-measurement period.
Other exceptional items
Other exceptional costs include a GBP0.1m (1H19: GBPNil) tax
penalty which is considered exceptional due to its size and nature.
The amount represents management's best estimate of tax penalties
that will arise in connection with revisions to certain transfer
pricing transactions that have occurred in prior years. The total
provision for tax penalties that the Group holds is GBP1.5m (1H19:
GBP0.6m).
5. Finance Costs
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Bank interest 0.3 0.2
Right of use asset finance costs 1.0 0.5
Other interest expense 0.4 0.3
------------ ------------
Total finance costs 1.7 1.0
------------ ------------
During the period ending 30 June 2020, the Group had drawn down
upon and repaid in full its revolving credit facility, full details
of the movement in borrowings can be found in note 10.
6. Taxation
Unaudited Unaudited
six months six months
to to
30 June 30 June
2020 2019
GBPm GBPm
Total current taxation 1.4 2.5
------------ ------------
Deferred taxation:
Total deferred taxation 0.1 0.4
---- ----
Tax expense 1.5 2.9
---- ----
Effective tax rate
The effective tax rate on reported profit before tax was 12.8%
(1H19: 26.6%).
The adjusted tax charge was GBP3.8m (1H19: GBP3.7m) giving an
effective tax rate of 26.0% (1H19: 24.5%) on adjusted profit before
tax of GBP14.6m (1H19: GBP15.1m) Adjusted profit before tax is an
adjusted measure which, is reconciled as part of the APMs section
in the Appendix below.
The adjusted tax charge is the total tax charge as disclosed in
the Condensed Consolidated Income Statement less the tax effects of
exceptional expenses and amortisation of acquired intangible
assets. The effective income tax rate represents the best estimate
of the average annual effective income tax rate expected for the
full year, applied to the profit before income tax for the six
months ended 30 June 2020 adjusted for discrete items as
required.
The Group's adjusted effective tax rate going forward is
expected to be in the region of 25% to 27%. The rate is higher than
the effective UK rate principally due to the impact of higher tax
rates in overseas countries and to a lesser extent disallowable
expenditure. There are some countries in which the tax rate is
lower than the UK, but the impact is small either because the
countries are not significant contributors to Group profit, or the
tax rate difference is not significant.
Other one-off items
In addition to the exceptional tax credit of GBP1.6m, within the
reported tax charge of GBP1.5m (and adjusted tax charge of GBP3.8m)
there is, in aggregate, an additional net credit of GBP0.9m in
respect of one-off and non-recurring items. These include the
impacts of changes in tax rates, return to provision true ups as
well as prior period corrections, which, in aggregate are
immaterial.
Exceptional tax credit
The deferred tax liability in respect of US assets acquired as a
result of the DLS acquisition have been recalibrated to more
accurately reflect the current US tax position. This has resulted
in an exceptional tax credit of GBP1.6m and has been treated within
exceptional items which is consistent with the Group's treatment of
acquisition related items.
Uncertain tax provisions
The Group holds uncertain tax provisions in relation to historic
transfer pricing arrangements between the UK, Ireland, the US as
well as other tax risks across the Group. These provisions total
GBP7.0m at 30 June 2020. (1H19: GBP4.4m).
7. Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity holders by the weighted average number of
ordinary shares in issue during the year.
Diluted earnings per share is calculated by adjusting the basic
earnings per share for the effects of share options and awards
granted to employees. These are included in the calculation when
their effects are dilutive.
Adjusted earnings per share is a trend measure, which presents
the long-term profitability of the Group excluding the impact of
specific transactions that management considers affects the Group's
short-term profitability. The Group presents this measure to assist
investors in their understanding of trends. Adjusted profit before
tax is the numerator used for this measure. The Group has
identified the following items to be excluded when arriving at
adjusted profit before tax: amortisation of acquisition intangible
assets and exceptional items.
Unaudited Unaudited
six months six months
to 30 June to 30 June
2020 2019
Earnings per ordinary share - basic (p) 11.2p 8.9p
Earnings per ordinary share - diluted
(p) 11.1p 8.7p
Adjusted earnings per ordinary share
- basic (p) 11.8p 12.6p
Adjusted earnings per ordinary share
- diluted (p) 11.7p 12.3p
Unaudited Unaudited
six months six months
to 30 June to 30 June
2020 2019
GBPm GBPm
Profit for the period attributable to
equity holders of the parent 10.2 8.0
Number Number
Basic weighted average number of shares
(million) 91.4 90.7
Employee share options and shares to
be issued (million) 0.8 1.9
------------ ------------
Diluted weighted average number of shares
(million) 92.2 92.6
------------ ------------
Unaudited Unaudited
six months six months
to 30 June to 30 June
2020 2019
GBPm GBPm
Profit for the period attributable to
equity holders of the parent 10.2 8.0
Amortisation of acquired intangible assets 1.6 2.1
Exceptional items 1.3 2.1
Deferred tax benefit associated with
amortisation of acquired intangible assets (0.4) (0.4)
Tax benefit associated with exceptional
items (0.3) (0.4)
Exceptional tax credit (1.6) -
------------ ------------
Adjusted profit attributable to equity
holders of the parent 10.8 11.4
------------ ------------
8. Dividend per share
Dividends paid in 1H20 were GBPNil (1H19: GBP6.3m). The dividend
per share in 2020 was Nil (2019: 7.0p per share).
9. Intangible assets
Customer Intellectual Capitalised
Cost Relationships Property Goodwill Development Software Total
GBPm GBPm GBPm GBPm GBPm GBPm
At 1 January 2019 48.3 64.9 235.3 10.1 11.3 369.9
Additions - - - 3.7 1.1 4.8
Re-measurement - - (1.2) - - (1.2)
Disposals - - - - - -
Effects of foreign
exchange (0.1) (0.2) (0.2) - - (0.5)
At 30 June 2019 48.2 64.7 233.9 13.8 12.4 373.0
Additions - - - 3.8 1.3 5.1
Disposals - - (17.1) - - (17.1)
Effects of foreign
exchange (1.4) (1.8) (5.7) - - (8.9)
At 31 December 2019 46.8 62.9 211.1 17.6 13.7 352.1
Additions - - - 4.2 1.6 5.8
Effects of foreign
exchange 2.4 3.1 8.7 - - 14.2
At 30 June 2020 49.2 66.0 219.8 21.8 15.3 372.1
Accumulated Amortisation
At 1 January 2019 (18.5) (60.8) (65.9) (1.1) (0.7) (147.0)
Charge for the year (0.9) (1.0) - (1.7) (0.7) (4.3)
Effects of foreign - - - -
exchange - -
At 30 June 2019 (19.4) (61.8) (65.9) (2.8) (1.4) (151.3)
Charge for the year (1.1) (1.4) - (2.2) (0.5) (5.2)
Disposals - - 17.1 - - 17.1
Effects of foreign
exchange 0.5 2.0 - - - 2.5
At 31 December 2019 (20.0) (61.2) (48.8) (5.0) (1.9) (136.9)
Charge for the year (1.0) (0.6) - (2.6) (0.6) (4.8)
Effects of foreign
exchange (0.9) (3.1) - - - (4.0)
At 30 June 2020 (21.9) (64.9) (48.8) (7.6) (2.5) (145.7)
Net book value 27.3 1.1 171.0 14.2 12.8 226.4
At 31 December 2019 26.8 1.7 162.3 12.6 11.8 215.2
At 30 June 2019 28.8 3.0 168.0 11.0 11.0 221.7
In the prior period, the Group wrote off goodwill relating to
non-core which was fully impaired and disposed of. No such similar
transactions have occurred in the current period.
The Group have reviewed for any indicators of impairment in the
Group's intangibles assets, particularly in the light of the
current COVID-19 pandemic and no indicators of impairment were
identified.
10. Interest-bearing loans
Unaudited Audited Unaudited
30 June 31 Dec 30 June
2020 2019 2019
Balance opening - 12.0 5.4
Drawn down during the period 63.0 - 26.2
Interest accrued during the period 0.3 - -
Repayments during the period (63.3) (12.0) (19.5)
Exchange movements - - (0.1)
Balance closing - - 12.0
---------- -------- ----------
At 30 June 2020, the Group had a five year GBP120m syndicate
revolving credit facility, expiring on 17 July 2023. The agreement
is for a GBP70m committed facility and includes a GBP50m accordion
(uncommitted) facility as well. At 30 June 2020, GBPNil was drawn
on the facility (December 2019: GBPNil; June 2019: GBP12.0m).
On drawing the funds under the GBP70m committed revolving credit
facility, the Group elects the repayment period to affect the
interest on the loan but the funds are repayable at the Group's
discretion subject to the wider terms of the facility. Accordingly,
drawdowns under this facility have been categorised as non-current.
The loan bears interest at LIBOR+ margin, the margin varying
between 1.15% and 2.15% depending on the ratio of the Group's total
net debt to its adjusted earnings before interest, tax,
depreciation, amortisation and exceptional items.
11. Share-based compensation grants
On 17 April 2020, 1,227,253 Long Term Incentive Plan (LTIP)
shares were awarded to certain key senior executives and employees
of the Group.
The LTIPs consist of shares based on market conditions and are
split between Earnings per Share (EPS) and TSR conditions. The fair
value of the award at Grant was identified as between GBP4.82 and
GBP3.72 per LTIP respectively.
The LTIPs include a service condition and are due to vest over a
three year period from the grant date.
12. Related parties
There are no material related party transactions requiring
disclosure under IAS 24 "Related Party Disclosures" other than
compensation of key management personnel, which will be disclosed
in the Group's Annual Report for the year ending 31 December
2020.
Appendix - Alternative performance measures
Alternative performance measures
The Board uses a number of alternative performance measures
which, are measures that can be directly reconciled to GAAP
measures. The Board primarily uses 'adjusted' measures as they
exclude the impact of non-recurring transactions which are not part
of the normal course of business. Adjusted measures therefore are
calculated by removing the impact of exceptional items and
amortisation of acquired intangibles.
Adjusted measures used by the Board include:
-- Adjusted operating profit : operating profit before
exceptionals and amortisation of acquired intangibles (reconciled
on the face of the income statement).
-- Adjusted profit after tax : profit after tax before
exceptionals and amortisation of acquired intangibles (reconciled
in note 7 as the numerator for adjusted EPS and adjusted diluted
EPS).
-- Adjusted operating cash flows : operating cash flows before
exceptional items (reconciled below).
-- Adjusted effective tax rate: effective tax rate before
exceptionals, amortisation of acquired intangibles and exceptional
tax (reconciled below).
-- Adjusted earnings per share : earnings per share before
exceptionals net of tax, amortisation of acquired intangibles net
of tax and exceptional tax amounts (reconciled in note 7).
-- Constant currency: Prior period underlying measures,
including revenue are retranslated at the current period exchange
rates to neutralise the effect of currency fluctuations.
Adjusted profit before
tax reconciliation 1H20 1H19
Statutory profit before
tax 11.7 10.9
----- -----
Exceptional items 1.3 2.1
----- -----
Amortisation of acquired
intangibles 1.6 2.1
----- -----
Adjusted profit before
tax 14.6 15.1
----- -----
Adjusted operating
cash flows reconciliation 1H20 1H19
Adjusted operating
profit 16.3 16.1
------ -------
Depreciation and amortisation
from non-acquired
intangibles 9.0 7.0
------ -------
Share based payment
expense 0.8 1.6
------ -------
Net working capital
changes (2.7) (15.1)
------ -------
Adjusted operating
cash flows 23.4 9.6
------ -------
Operating cash conversion
reconciliation 1H20 1H19
Adjusted operating
profit 16.3 16.1
----- -----
Adjusted operating
cash flows 23.4 9.6
----- -----
Operating cash conversion 144% 60%
----- -----
Adjusted effective
tax rate 1H20 1H19
Tax charge 1.5 2.9
------ ------
Exceptional tax credit 1.6 -
------ ------
Tax on amortisation
of acquired intangibles
(note 7) 0.4 0.4
------ ------
Tax on exceptional
items (note 7) 0.3 0.4
------ ------
Adjusted tax charge 3.8 3.7
------ ------
Adjusted profit before
tax 14.6 15.1
------ ------
Adjusted effective
tax rate 26.0% 24.5%
------ ------
KPIs
KPIs are those key performance indicators used by management and
the Board to monitor the success of the Group. These differ from
the Group's alternative performance measures as they are measures
that cannot necessarily be calculated from GAAP measures.
The KPIs, reviewed by the Board include revenue growth, gross
margin (including language services gross margin), and Free Cash
Flow. Free cash flow is defined as cash generated from operations
after interest and tax costs, maintenance capital expenditure and
capitalised research and development costs. Maintenance capital
expenditure is the recurring level of capital expenditure required
for the business in its current form to operate in medium term and
excludes non-recurring investment in capitalised system and
infrastructure costs.
Definitions of the Group's other KPIs are set out below:
-- Technology Annual Recurring Contract Value (ARCV): Annual
Recurring Contract Value (ARCV) is the amount of revenue recognised
in the last month of the reporting period, annualised and generated
from technology related subscription contracts (SaaS, hosting and
support and maintenance) and term contracts.
-- Language Services Repeat Revenue Rate (RRR): Current year
Language Services revenue earned from prior year customers as a
percentage of prior year Language Services revenue; the difference
between RRR and total revenue is current year Language Services
revenue from new customers.
-- Linguistic productive utilisation: the percentage of
productive time in-house linguists spent on billable work across
the financial period
The strategic KPIs set out above have no direct reference to any
GAAP measure and hence cannot be reconciled to the Group's
financial statements. RRR and ARCV is an annualised measure of
contracts at a point in time and hence cannot be reconciled to
revenue recognised during the year.
Net cash comprises cash and cash equivalents and external
borrowings. Net cash excludes lease liabilities.
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 half year management report includes a fair review of the information required by:
(a) DTR 4.2.7R of the Disclosure Guidance 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 Guidance 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
Adolfo Hernandez
Chief Executive Officer
Xenia Walters
Chief Financial Officer
11 August 2020
INDEPENDENT REVIEW REPORT TO SDL PLC
Introduction
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 2020 which comprises of the Condensed
Consolidated Income Statement, Condensed Consolidated Statement of
Comprehensive Income, Condensed Consolidated Statement of Financial
Position, Condensed Consolidated Statement of Changes in Equity,
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.
This report is made solely to the company in accordance with
guidance contained in International Standard on Review Engagements
2410 (UK and Ireland) "Review of Interim Financial Information
Performed by the Independent Auditor of the Entity" issued by the
Auditing Practices Board. To the fullest extent permitted by law,
we do not accept or assume responsibility to anyone other than the
company, for our work, for this report, or for the conclusions we
have formed.
Directors' Responsibilities
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 Disclosure Guidance and Transparency Rules of the United
Kingdom's Financial Conduct Authority.
As disclosed in note 1, the annual financial statements of the
group are prepared in accordance with IFRSs as adopted by the
European Union. The condensed set of financial statements included
in this half-yearly financial report has been prepared in
accordance with International Accounting Standard 34, "Interim
Financial Reporting", as adopted by the European Union.
Our Responsibility
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.
Scope of 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 United Kingdom. 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 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 2020 is not prepared, in all material respects, in accordance
with International Accounting Standard 34 as adopted by the
European Union and the Disclosure Guidance and Transparency Rules
of the United Kingdom's Financial Conduct Authority.
Ernst & Young LLP
Reading
11 August 2020
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
IR FFFSLTDIILII
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