SDL and Lionbridge Show Profit in First Half of 2008

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Global Watchtower

Common Sense Advisory Blogs

Posted by R. Michael Powers on August 5, 2008 in the following blogs: Business Globalization, Best Practices, Market Data
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This week’s earnings announcements by Lionbridge and SDL were not exactly earth-shaking news items on Wall Street, but the language industry is our beat. So, these updates typically merit some attention from us – we recently provided some advance analysis in the lead up to this latest round of results.

The SDL announcement, in the form of a press release, plays like a highlights reel. Revenue is up 40 percent, at GBP 76 million – that's US$148 million – for the first half of the year. Organic growth is up 24 percent. Meanwhile, organic growth in constant currency terms rose at a lower rate of 16 percent – still, the upward trend is generally seen as a good thing.

The company’s technology segment doubled in revenue, with strong organic growth and the contributions of recent acquisitions Tridion and Idiom. We sometimes hear that SDL cannot be fairly compared to traditional LSPs because they are a technology play. Interestingly, the language services business, with a ‘profit before amortization’ level of 16.5 percent, is more than the technology piece, which comes in at 13.7 percent.

SDL’s press release touts the “successful integration of Idiom”. However, in the brief narrative provided by Chairman Mark Lancaster, the acquisition is described plainly as, “meeting expectations.” This ambiguous designation is reminiscent of the report card children receive when they attend a grades-free Montessori School.

Across the pond, Lionbridge CEO Rory Cowan and CFO Don Muir had the rare pleasure of announcing a profit – US$0.02 per share. In contrast to the press release method used by their rivals in the UK, Messrs. Cowan and Muir had to explain their results to a live audience via conference call. They then submitted themselves to the ritual questioning from information-hungry investors. It was a friendly crowd today.

Revenue for the quarter was a record US$125.5 million. And, as we mentioned above, there was a profit to celebrate. The profitability came from below-the-line management of the company’s finances, rather than from operating improvements. Lionbridge’s gross margin was down from the same quarter last year, at 31.5 percent, but Cowan didn’t let that detail dampen the mood. “Last year is in the past”, he declared, opting to compare the margins to the weaker first quarter of 2008.

Lionbridge also reported some interesting developments with regard to its business operations. One of the company’s core competencies is managing a worldwide array of multilingual freelancers, and LIOX is moving into search engine optimization (SEO) on the same model. Because many LSPs function primarily as sales and project management organizations, this product line extension shows promise.

The Waltham-based company also increased the percentage of work handled by its Logoport system from 45-50 percent one year ago to about 60 percent today. Getting more projects – and larger-sized ones – onto this platform will be a key to improving Lionbridge’s lagging gross margins. This will also help them shun smaller-scale work that requires labor-intensive project management. We’re not even hinting that there may be ways to increase the global adoption of Logoport.

We are not stock market analysts, nor do we envy that gig, but it is always fun to watch how markets react to earnings announcements. LIOX shares floated up above US$3.20 this afternoon – a 72 percent climb from the nadir of two weeks ago – before settling in to a modest gain of 8 percent on modest volume.

SDL investors seemed perplexingly unimpressed with the company’s results. Or, at least, that is what their collective reaction on the day of the announcement indicates.

SDL 5-day

Figure 1: SDL Share Price - Five Days to August 5
Source: BigCharts.com and Common Sense Advisory, Inc.

That said, when we step back to view SDL’s share price over a two-month stretch, we see a strong run-up in the weeks prior to the announcement, providing a graphic example of the old adage, “buy the rumor, sell the fact.”

Figure 2: SDL Share Price - Two Months to August 5
Source: BigCharts.com and Common Sense Advisory, Inc.

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