SDL : Final Results

18 March 2014

SDL PLC

Preliminary results for the year ended 31 December 2013

Our transformation programme has set the foundations and structure to better embrace the market opportunity and deliver solutions for Customer Experience Management

SDL plc ("SDL" or "the Group"), a leader in Customer Experience Management , announces its audited preliminary results for the year ended 31 December 2013. 

Summary:

·      Language services: recovery to 1.7% revenue growth in the second half accompanied by return to normal PBTA margin.

·      Content & Analytic Technologiesand Language Technologies: in combination broadly flat in terms of revenues but losses incurred due to previously announced significant investment made in R&D and sales & marketing. 

·      New customer wins in the period include: Acer, Adidas, Haier, Skype, Turkish Airlines and VMware

·      Significant restructuring of the business to properly align with market opportunity

·      Implemented large scale global systems to manage the business more effectively

·      Several proven industry leaders hired to fortify the senior executive team

·      Post period end, we launched SDL Customer Experience Cloud™, a unified suite of offerings to help marketers create and deliver seamless global customer experiences across all channels, devices and languages

·      No final dividend due to the restructuring and investment costs in 2013

Outlook

The foundations and infrastructure are in place. Throughout 2013, the hard decisions and investments have been made.  However, there will be a lag before the restructuring and investments take full effect. As we move through 2014, we expect the business to gain bookings, revenue and profit momentum as the new structure and initiatives take effect. SDL has a solid foundation of best of breed integrated technology and, we have put in place an organisational structure to deliver it. This gives us great deal of confidence we will return to the levels of profitability and exceed the levels of technology growth we had in the past.

Note: Adjusted earnings per share is before amortisation of intangibles and one-off costs

Mark Lancaster, Chief Executive Officer, commented:

"In 2013 we undertook some hard but essential changes that will provide the impetus for our future success. SDL's structure is now more aligned to the market opportunity and I believe that we now have the foundations in place to capture the opportunities in customer experience management.

Early signs show that the decision to invest is strengthening our business, and we enter a new financial year with an executive leadership team with the right levels of experience and expertise and a go-to-market approach built on the foundations of enhanced global systems.

We expect the market to continue to evolve rapidly over the next three years, as consumers demand better customer engagement through hand held devices and general online access to relevant information. As we move through 2014, we expect the business to gain bookings momentum in the latter half of the year as the new structure and initiatives take effect."

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About SDL

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

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

Chairman's Statement

Although the financial performance of SDL in 2013 was not as we anticipated at the beginning of the year as bookings growth did not materialise as quickly as we had planned following our investments in sales and marketing, I believe that we have made significant progress in restructuring the business in order to ensure long-term value creation for our shareholders.

Mark Lancaster returned to the role of Chief Executive Officer at the end of 2012. Although we initially expected that this would be an interim appointment, by the end of the first quarter, it became apparent that Mark's leadership would be key in effecting a more fundamental restructuring of the organisation. Consequently, the Board felt that it would be inappropriate for Mark to stay in the roles of both Chairman and Chief Executive Officer. During the second quarter, the Board ran a process to find a new Chairman and that resulted in me taking on that role at the beginning of July. 

I believe that it is important that the Board has the requisite skills and experience to support Mark and his executive team in delivering profit and growth, in order to enable long-term value creation for our shareholders. Therefore, whilst Mark set about the vital task of restructuring the Executive team, I have taken the opportunity to look at the structure and capabilities of the Board. This has resulted in recruiting two new Non-Executive Directors.

I am pleased to welcome Alan McWalter to the Board. He joined us in March 2014. Alan has a wealth of valuable experience and has succeeded me as Senior Independent Director.  He will also serve on the Audit and Remuneration Committees. We have also announced that Glenn Collinson will join SDL as a non-executive director and Chairman of the Remuneration Committee from June 2014.  He will also sit on the Audit Committee. Glenn has significant experience as both an Executive and Non-executive Director in technology businesses.

Having served on the Board of SDL for nearly 9 years, Joe Campbell has informed the Board that he will not stand for re-election at our AGM in April. On behalf of the Board, I would like to thank Joe for his valuable contribution to the business over many years. We also welcomed Dominic Lavelle to the Board as Chief Financial Officer replacing Matthew Knight who stepped down in November.  We thank Matthew for his contribution.  Dominic has 25 years of financial experience and proven credentials in turnaround situations.

Under Mark's leadership, the executive team has taken some bold steps in 2013, making significant changes in the operational structure to align the business with the significant market opportunity and laying the foundations for sustainable future growth. This has meant evolving from a business unit structure to an integrated global business.

In 2013, the executive management team began to execute a long-term go-to-market plan that has  required significant changes to the executive leadership team including the recruitment of individuals with the skills and experience to drive the business forward. Consequently, 2013 has seen a number of key hires into the business and also a number of departures. The Board believes that the investments being made and the initiatives being undertaken are thoughtful and considered.  Early signs show that the decision to invest in infrastructure and management is strengthening our business.

The Board remains very confident in the operational cash generation of the business. The Board has previously communicated a progressive dividend policy whereby dividends would be set based upon the evolution of our profits. However, as a result of the restructuring and investment costs in 2013, the Board will not be recommending a final dividend to the Annual General Meeting for 2013.

In many respects, 2013 has been a very difficult year for SDL. I believe it has also been a year when we have executed some fundamental changes to the business, which we believe are essential for our future success. These changes have impacted not only the Executive team, but also the entire workforce of SDL. I have been particularly impressed by the character, enthusiasm and energy of our employees during a period of rapid change. On behalf of the Board, I would like to record our thanks to them for their commitment, passion and hard work.

David Clayton

Chairman

CEO Review

This has without doubt been the toughest year SDL has ever had. Although the financial performance of SDL in 2013 was significantly below 2012, we feel the investments and restructuring we have made in 2013 set SDL up for a very prosperous future.  Revenues were £266.1 million (2012: £269.3 million). Profit before taxation, amortisation of intangible assets and "one off" costs ("PBTA") was £8.2 million (2012: £37.0 million). The loss before tax for the year was £24.4 million. The reduction in profits was due primarily to planned sales and marketing investments, significant restructuring, slightly reduced technology licence revenues as well as weaker first half margins in Language Services. The cash generated from operations was £15.8 million (2012: £25.8 million). Gross cash in the business at the year-end was £18.2 million (2012: £28.5 million) whilst net debt was £1.8 million (2012: cash £6.3 million).

Following my return to the business as CEO in late 2012, we have made some significant and necessary changes. The market has evolved significantly over the last 3 years and SDL needed to make structural changes to properly align the company with the market opportunity.

Considering the massive changes we have made to SDL's operational and management structure to align with the market opportunity, we are now in a great position to take advantage of our fast-evolving digital world. I believe we will probably look back on this year as being the most important in SDL's history, setting the foundations and structure to embrace this market opportunity. We had some great customer wins including Acer, Adidas, Haier, Nissan, Skype, Turkish Airlines and VMware and completely recovered our Language Service business margins to be one of the most efficient in the world due to our investment in technology, process and infrastructure.

We have restructured the business from the ground up, creating a structure that provides a holistic solution to the market's needs, not just from the technology solutions, where we have always been strong, but also from a go to market sales and services delivery model. We have changed our structure from a product line focused model to that of a customer centric business model.  During the second half of 2013, SDL hired several experienced technology executives to the company.

·      We have aligned the sales force under a Chief Revenue Officer; Bernadette Nixon, an experienced software sales leader. We now have a sales force with an aligned execution model that will provide greater coverage and better leverage and solutions for our customers.

·      Research and Development is led by Dennis Van der Veeke, providing better product integration and technology aligned with market needs

·      We put in place a Chief Operating Officer;  Jean-Pierre Dekker to provide a single customer centric go to market and delivery function

·      Marketing is now centralised under Paige O'Neil, Chief Marketing Officer, to enhance our brand and go to market delivery

·      Dominic Lavelle has been hired  as CFO with 25 years of financial experience

The new hires are proven industry leaders in their field that understand how to consolidate and integrate complementary technologies to deliver business benefits. They join Dominic Kinnon who heads up language solutions, and, as a team, are jointly charged with delivering on SDL's customer experience management vision.

Of equal importance, we have implemented a number of large scale global systems to help manage the business more effectively. These include a new global HR system, CRM and financial systems. The projects were kicked off early 2013 and are expected to be fully operational by the end of 2014.

We rolled out a number of training and realignment programs in the last quarter of 2013 and these will continue in the first half of 2014 to ensure complete alignment throughout the whole organisation.

Throughout the organisation, this has created new opportunities, allowing us to bring in new talent and right size the organisation, creating cost savings and efficiencies.

The technology

Over the last 10 years, SDL has acquired, and then further developed discrete technology solutions to create a single integrated technology. In January2014, we launched theSDL Customer Experience Cloud™, a unified suite of offerings to help marketers create and deliver seamless global customer experiences across all channels, devices and languages.

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

The market

As the digital world continues to grow exponentially, both the opportunity and challenges this presents to businesses is unprecedented and will require companies to change the way they operate. The amount of information relating to products and services that is rapidly becoming available in our digital world is both enormous and valuable. However, to consume this information and filter the value to gain insights of what customers find attractive and then orchestrate a business to deliver the right contextual information at the right time across all channels can only be solved with technology. SDL's goal is to provide businesses with an integrated suite of technology that allows companies to engage with their customers by gaining insights into their customers, orchestrating the disparate silos in their business to then provide the best possible information to their customers across the whole customer journey from sales through to support.

Competition in the Customer Experience Management space has intensified; there has been a considerable amount of M&A activity in the past two years with the larger IT players, such as Oracle, Adobe, Salesforce, HP and IBM making similar technology-led acquisitions that SDL made over the last six years. We feel comfortable with our positioning and differentiation. Our focus is to provide an integrated suite of technology that is focused on customer engagement versus traditional customer relationship management platforms that are focused more on back office management as opposed to revenue-driving customer engagement. We expect the market to continue to evolve rapidly over the next three years, as consumers demand better customer engagement through hand held devices and general online access to relevant information. This, in turn, will force companies to provide relevant information at all points in the customer life cycle.

Outlook

The foundations and infrastructure are in place. Throughout 2013, the hard decisions and investments have been made.  However, there will be a lag before the restructuring and investments take full effect. As we move through 2014, we expect the business to gain bookings, revenue and profit momentum as the new structure and initiatives take effect. SDL has a solid foundation of best of breed integrated technology and, we have put in place an organisational structure to deliver it. This gives us great deal of confidence we will return to the levels of profitability and exceed the levels of technology growth we had in the past.

Financial Review

Summary Performance

The Group's performance in the year was significantly below last year. Revenues were £266.1 million (2012: £269.3 million). Profit before taxation, amortisation of intangible assets and one-off costs ("PBTA") was £8.2 million (2012: £37.0 million). The reduction in profits was primarily due to planned sales and marketing investments and slightly reduced technology licence revenues, plus weaker first half margins in Language Services.

"One-off" costs of £25.1 million comprise: redundancy costs of £2.5 million, historic litigation costs of £1.4 million (2012: £1.5 million), onerous lease costs of £0.4 million, , other costs of £0.4 million, and an impairment of goodwill of £20.4 million in our Content and Analytics Technologies segment. The impairment is a natural consequence of a disappointing trading year as this segment delivered 2013 losses of £5.5 million.

After these one-off costs, loss before tax was £24.4 million (2012: £27.4 million profit).

The cash generated from operations was £15.8 million (2012: £25.8 million). Gross cash in the business at the year-end was £18.2 million (2012: £28.5 million) whilst net debt was £1.8 million (2012: cash £6.3 million). Capital expenditure was £6.1 million (2012: £5.4 million) due to increased investment in SaaS cloud infrastructure. Tax paid was £10.3 million (2012: £8.3 million), above the profit and loss tax charge shown in the income statement primarily due to some prior year tax payments and the deferred tax credit for intangible asset amortisation which suppresses the profit and loss charge.

The headline revenue decrease of 1.2% can be attributed to an underlying organic decline of 3.6%, 1.0% growth from acquisitions and a 1.4% increase arising from foreign exchange effects. Geographically, the decline in Asia was 2.2%, North America was 0.2%, with Europe decreasing by 4.3%.

The business continues to benefit from a diverse mix of regions, industry verticals and customers, limiting the group's exposure to adverse economic conditions in certain countries and sectors. Customer concentration continues to reduce with the 20 largest customer contributing 26% (2012: 27%) of revenue in 2013. No single customer contributes more than 5% of group revenues.

Performance by Segment

As a result of the restructuring described in the CEO Review, the Group is now organised into business units based on services and technology products, and has three reportable segments.

Language Services (contributing £150.5 million or 56% of total revenue and £17.6 million of PBTA) (2012: contributing £151.1 million or 56% of total revenue and £23.2 million of PBTA). 

Segment revenue reduced by 0.4% in the year, comprising an underlying decline of 2.0% at constant currency and a 1.6% gain on foreign exchange. A weaker performance in the first half, which saw a half on half headline revenue decline of 2.5%, was turned around in the second six months of the year where half on half revenue growth of 1.7% was achieved.  A stronger second half was driven by growth in continental Europe where revenue grew by 7% in the half or 6% for the year and in Canada where revenue grew by 9% in the half or 5% for the year.

Segment PBTA margin declined to 11.7%, due to the disappointing first half. PBTA margin was much improved in this business towards the end of the year as a result of the wide-reaching efficiency programme. The second half contributed £10.7 million to the PBTA result for the year at PBTA margin of 13.8%, an improvement on the 9.4% achieved in the first half.

We continue to invest in improving our infrastructure, including expanding the use of automated translation technology, new workflow efficiency tooling and other productivity improvement projects. Adoption of the Intelligent Machine Translation (iMT) solution across the customer base has increased from 16% to 20%. During the period we have grown our presence in Poland and India by approximately 60 heads. We have also established a new translation network office in Ho Chi Minh in Vietnam, leveraging our existing presence in this country.

267 new accounts were added globally, which are expected to contribute to growth in 2014.

New clients in 2013 include Acer, Asus, Carestream, Haier, Lenovo, Nissan, NTT and Skype.

Content & Analytic Technologies (contributing £79.4 million or 30% of revenue and losses of £5.5 million PBTA) (2012: contributing £79.1 million or 29% of revenue and £10.5 million PBTA).

This segment comprises Web Content Management Solutions, eCommerce technologies and Structured Content Technologies, plus Marketing Analytics, Campaign Management and Social Intelligence technologies (the main components of the Alterian acquisition which completed on 27 January 2012). Prior period comparatives include only 11 months of Alterian trading.

Segment revenue grew by 0.4% in the year, comprising an underlying decline 4.2% offset by an acquisition effect of 3.6%, and a foreign exchange effect of 1.0%.

The segment PBTA margin was -7% (2012: +13%), due to £12.1 million of planned sales, marketing and research and development investments made during the first half of the year which did not deliver the planned revenue increase in the second half of the year.

New clients in 2013 include Amerigroup Corporation, Amalgamated Banks of South Africa, Brown Forman, Frito Lay, NH Hotel, Prostate Cancer UK, Skype, Tekla Corporation and Turkish Airlines.

Language Technologies (contributing £36.2 million or 14% of total revenue and losses of £3.9 million of PBTA) (2012: contributing £39.1 million or 15% of revenue to the group and £4.0 million of PBTA).

This segment comprises Desktop translation technologies, Enterprise translation solutions and Machine Translation.

Segment revenue reduced by 7.4% in the year, comprising an underlying decline of 8.7% and foreign exchange effects contributing a 1.3% increase. Whilst sales of translation productivity tools remained relatively stable, licence revenues were affected by weak licence bookings in enterprise translation management tools. Although gross margins were broadly maintained at 82% (2012: 84%), a combination of declining segment revenues and maintaining investments resulted in a PBTA margin for the year of -11% (2012: +10%). 

New clients in 2013 include Adidas, Capitol IQ, VMware and Wurth.

Technologies ( combined revenue of £115.6 million or 43% of total revenue and losses of £9.4 million PBTA) (2012: £118.2 million or 44% of revenue and £14.5 million PBTA)

Software as a Service ("SaaS") sales continued to increase as a proportion of total licence sales (2013: 49%; 2012 41%), a positive trend that improves the revenue visibility of the business going forward.

Gross Margin

The group's gross margin was 55%, a decrease from 56% in 2012.

Administrative Expenses

Administrative costs excluding intangibles amortisation and one-off costs increased in 2013 to £137.4 million (2012: £114.3 million).

Research and development costs of £24.8 million (2012: £22.9 million) are included in administrative expenses. This includes £0.5 million of incremental cost for an additional month of research and development for Alterian that was acquired on 27 January 2012. Significant product releases in 2013 were SDL Trados Studio 2014, SDL Intelligent Marketing Suite, SDL Customer Commitment Framework, SDL Fredhopper 7.5, SDL Tridion 2013 and www.freetranslation.com.

Development costs have been reviewed and the Board remains of the opinion that capitalisation criteria under International Accounting Standard (IAS) 38 are not met. Consequently no development costs are capitalised on the balance sheet.

Headcount was 3,205 at the end of 2013, compared to 2,985 at the end of 2012. Employee related costs remain the most significant component of group costs, amounting to 67% of group overheads (2012: 69%) excluding amortisation of intangibles and one-off costs.

Intangible assets ascribed to certain of the Group's software and customer relationships arising from acquisitions are amortised over periods of between 5 and 10 years and the carrying value is formally reviewed on an annual basis to assess whether there are indicators of impairment.  The intangible asset amortisation charge in 2013 was £7.5 million (2012: £8.1 million).

Intangible assets and goodwill were allocated to three Cash Generating Units ("CGU") namely Language Services, Content and Analytic Technologies and Language Technologies.  The 2013 impairment review resulted in an impairment of £20.4 million in the Content and Analytic Technologies segment.

Earnings Per Share

Basic earnings per share when adjusted for amortisation of intangibles and one-off costs ("adjusted EPS") decreased by 93% to 2.57 pence. The deferred tax benefit associated with the amortisation of the intangible fixed assets and one-off costs of £2.6 million (2012: £2.2 million) and one-off costs of £25.1 million, has been adjusted in this calculation of EPS. Basic losses per share were 34.78 pence (2012: earnings, 26.12 pence).

Financing Costs

Interest costs in 2013 were £0.5 million (2012: £0.4m). At the start of the year, drawn borrowings were £22.2 million. £2.2 million was repaid in January 2013. Drawn borrowings remained at £20.0 million throughout the year. Net debt was £1.8m at year end.

Cash flow

The £28.8 million decline in PBTA, before one-off costs, was partially offset by an improved working capital performance with an inflow of £5.7 million (2012: £8.1 million outflow), resulting in a reduction in cash flow from operations of only £12.0 million; net cash flow from operating activities was £5.5 million (2012: £17.5 million)

Borrowing Facilities

During the year, the group's existing borrowing facilities of £27 million were replaced with a single revolving credit facility of £30 million expiring in September 2015; £20 million of this facility was utilised at the year-end.

Pricing of this new £30 million borrowing facility is at a 1.15% margin on LIBOR. Under the credit facility agreement, SDL is subject to certain financial covenants which are required to be tested quarterly. These covenants relate to EBITA: Borrowing Costs; Net Cash Flow: Debt Service Liability and Gross Borrowings: EBITDA. The Board remains of the opinion that operating with low levels of debt is appropriate in the current economic environment, whilst maintaining sufficient debt facility headroom to finance normal investment activities.

Derivatives and other Financial Instruments

The Group has cash and short-term deposits of varying durations to fund its working capital needs and other financial assets and liabilities such as trade debtors and trade creditors arising directly from its operations. The Group's policy continued to be that no active trading in financial instruments will be undertaken within the operating units and all decisions on use of financial instruments will be taken at Group level under the direction of the Chief Financial Officer.

Taxation

SDL is a global business and as such the Group's effective tax rate is heavily influenced by the territorial mix of where operating profits are earned. A detailed analysis of the taxation charge is included in note 4 to the accounts.

The tax charge for the year is £3.5 million (2012: £6.5 million).

Acquisition of Bemoko Consulting Limited

On 8 February 2013, the Group acquired 100% of the share capital of Bemoko Consulting Limited, an unlisted company based in the United Kingdom. The principal activity of Bemoko Consulting Limited is the provision of mobile solutions.

The total cost of the combination comprises £2.2 million of which £1.4 million was funded from the Group's existing cash resources and £0.8 million of contingent consideration will be settled in shares.

Trados Litigation update

As reported previously, the group has ongoing litigation related to the Trados acquisition. In 2013, the Court of Chancery in the State of Delaware has ruled in favour of the former Trados Directors that there was no breach of fiduciary duty in the sale of Trados to the Company. The judgement allows for the plaintiff to seek recovery of some of their legal costs from the defendants on the grounds that certain aspects of the defence was given in bad faith, this is a cost would be a liability to the Trados Directors personally under Delaware law. There is also the possibility the Plaintiff appeals the decision.  If the appeal by the Plaintiffs is successful there is a potential, significant reimbursement of funds from the Trados directors to SDL. If the Trados Directors are successful in upholding the ruling, there could be additional legal costs to pay by SDL of up to £0.2 million.

SDL plc

Consolidated INCOME STATEMENT

for the year ended 31 December 2013

SDL plc

Consolidated STATEMENT OF COMPREHENSIVE INCOME

for the year ended 31 December 2013

SDL plc

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

As at 31 December 2013

SDL plc

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

for the year ended 31 December 2013

SDL plc

consolidated STATEMENT OF CASH FLOWS

for the year ended 31 December 2013

SDL plc

notes to the financial INFORMATION

1.   BASIS OF ACCOUNTING

Basis of preparation

The financial information set out above does not constitute the Group's statutory financial statements for the years ended 31 December 2013 or 2012.  Statutory consolidated financial statements for the Group for the year ended 31 December 2012, prepared in accordance with adopted IFRS, have been delivered to the Registrar of Companies. The auditors have reported on the 2012 accounts; their report was (i) unqualified, (ii) did not include a reference to any matters to which the auditors drew attention by way of any emphasis without qualifying their opinion and (iii) did not contain a statement under Section 498 (2) or (3) of the Companies Act 2006.

The financial information for the year ended 31 December 2013 has been prepared by the directors based upon the results and position that are reflected in the consolidated financial statements of the Group.

The consolidated financial statements of SDL plc and its subsidiaries have been prepared in accordance with International Financial Reporting Standards as adopted by the EU as relevant to the financial statements of SDL plc.

Significant accounting policies

The accounting policies adopted in the preparation of the condensed consolidated financial information are consistent with those followed in preparation of the Group's annual financial statements for the year ended 31 December 2012.

In line with UK Corporate Governance Code requirements, the Directors have made enquiries concerning the potential of the business to continue as a going concern.

The company has a £30m RCF facility with RBS which currently matures in September 2015 and the company has been in discussions with RBS in order to amend and extend this facility. RBS have issued a credit approved term sheet which extends the facility to June 2017 (if required by the group and subject to the group meeting certain tests in 2014). As with the current facility, the availability of the amended facility is also subject to number of conditions, such as quarterly covenant tests. The company expects to finalise agreement with the bank very shortly.

The Directors' enquiries included a review of performance in 2013, 2014 annual plans, a review of working capital including the liquidity position, financial covenant compliance and a review of current cash levels. As a result, they have a reasonable expectation that the group has adequate resources to continue in operational existence for the foreseeable future. Given this expectation they have continued to adopt the going concern basis in preparing the accounts.

2.   SEGMENT INFORMATION

The Group operates in the Customer Experience Management industry. For management purposes, the Group is organised into business units based on their products and services, and following a reorganisation in the year, has three reportable operating segments as follows: 

·      The Language Services (formerly referred to as Global Solutions) segment is the provision of a translation service for customer's multilingual content in multiple languages.

·      The Content and Analytic Technologies segment (formerly the Content Management Technologies and Campaign Management, Analytic and Social Intelligence segments) is the sale of content management, campaign management, social media monitoring and marketing analytic technologies together with associated consultancy and services.

·      The Language Technologies segment is the sale of enterprise, desktop and statistical machine translation technologies together with associated consultancy and other services

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

In accordance with IFRS8, the operating segments for the comparative period have been restated to the operating segments that exist in 2013.

Year ended 31 December 2013

Year ended 31 December 2012 -restated

Segment assets:

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

(2) Segment assets do not include cash (£28.5m), Corporation Tax (£1.2m) and Deferred Tax (£4.4m).

Geographical analysis of external revenues by country of domicile is as follows:

Geographical analysis of non-current assets excluding deferred tax is as follows:

Goodwill and intangibles recognised on consolidation are included in the country which initially acquired the business giving rise to the recognition of goodwill and intangibles.

3.   OTHER REVENUE AND EXPENSES

Group operating profit is stated after charging/(crediting):

The net foreign exchange gains above arose due to movements in foreign currencies between the time of the original transaction and the realisation of the cash collection or spend, and the retranslation of US Dollar and Euro denominated intra-Group loans.

One-off costs

One-off costs relate to costs associated with the ongoing historic litigation claim against the Group, the costs associated with the re-organisation of the Group in late 2013 and a goodwill impairment write down relating to the Group's Content and Analytic Technologies CGU.

These have been separately disclosed in the income statement to provide a better guide to underlying business performance.

4.   INCOME TAX

(a) Income tax on profit:

Consolidated income statement

Consolidated statement of other comprehensive income

A tax credit in respect of share based compensation for current taxation of nil (2012: credit of £0.5 million) has been recognised in the statement of changes in equity in the year.

A tax credit in respect of share based compensation for deferred taxation of £0.2 million (2012: credit of £0.2 million) has been recognised in the statement of changes in equity in the year.

(b) Factors affecting tax charge:

The tax assessed on the profit on ordinary activities for the year is higher than the standard rate of income tax in the UK of 23.25% (2012: 24.5%). The differences are reconciled below:

5.   EARNINGS PER SHARE

The calculation of basic earnings per ordinary share is based on a loss after tax of £27.9 million (2012: profit £20.9 million) and 80,283,053 (2012: 79,851,785) ordinary shares, being the weighted average number of ordinary shares in issue during the period. 

The diluted earnings per ordinary share is calculated by including in the weighted average number of shares the dilutive effect of potential ordinary shares related to committed share options as described in note 7. For 2013, the diluted ordinary shares were based on 81,222,432 ordinary shares that included 939,379 potential ordinary shares.

The following reflects the income and share data used in the calculation of adjusted earnings per share computations before one-off costs:

There have been no material transactions involving ordinary shares or potential ordinary shares between the reporting date and the date of this financial information.

6.   INTANGIBLE ASSETS

Customer relationships and intellectual property are amortised on a straight-line basis over their estimated useful lives of between 5 and 10 years.   As from 1 January 2004, the date of transition to IFRS, goodwill is no longer amortised but is now subject to annual impairment testing. 

7.   SHARE-BASED PAYMENT PLANS

SDL Share Option Scheme

The table below sets out the number and weighted average exercise prices (WAEP) of, and movements in, the SDL Share Options Scheme during the year:

The weighted average share price at the date of exercise for the options exercised is £3.90 (2012: £6.63).

For the share options outstanding as at 31 December 2013, the weighted average remaining contractual life is 5.76 years (2012: 5.64 years).

The fair value of equity settled share options granted under the SDL Share Option Scheme is estimated as at the date of grant using the Black Scholes model. The following table lists the inputs and key output to the model:

The range of exercise prices for options outstanding at the end of the year was £1.17 - £7.48 (2012: £1.17 - £7.48).

SDL Long Term Incentive Plan

The fair value of equity-settled shares granted under the SDL Long Term Incentive Plan is estimated as at the date of grant using a Monte-Carlo model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs and key output to the model in the year of grant:

All LTIPs are exercisable at nil cost to the individual (with the exception of the 1p nominal value of each share awarded).

Retention Scheme Award

The fair value of equity-settled shares granted under the SDL Retention Share Plan is estimated as at the date of grant using a Black Scholes model, taking into account the terms and conditions upon which the options were granted. The following table lists the inputs and key output to the model used in the year of grant:

All RSPs are exercisable at nil cost to the individual (with the exception of the 1p nominal value of each share awarded).

SDL Save As You Earn Scheme (SAYE)

The table below sets out the number and movements in, the SDL Save As You Earn Scheme during the year:

For the SAYE shares outstanding as at 31 December 2013, the weighted average remaining contractual life is 1.82 years (2012: 1.86 years).

The fair value of equity settled share options granted under the SDL SAYE Scheme is estimated as at the date of grant using the Black Scholes model. The following table lists the inputs and key output to the model in the year of grant:

8.   ADDITIONAL CASH FLOW INFORMATION

Analysis of group net debt:

9. BUSINESS COMBINATIONS

Acquisition of Bemoko Consulting Limited

On 8 February 2013, the Group acquired 100% of the share capital of Bemoko Consulting Limited, an unlisted company based in the United Kingdom. The principal activity of Bemoko Consulting Limited is the provision of mobile solutions.

The total cost of the combination comprises £2.2 million of which £1.4 million was funded from the Group's existing cash resources and £0.8 million of contingent consideration will be settled in shares.

The values of the identifiable assets and liabilities of Bemoko Consulting Limited as at the date of acquisition were:

The maximum contingent consideration is £0.8 million. The fair value was calculated at £0.8 million and under IFRS 3 (revised) any re-measurement will be recognised in the income statement.

From the date of acquisition, Bemoko Consulting Limited has contributed £0.4 million of revenue and a loss of £0.2 million to the net loss after tax of the Group. If the combination had taken place at the beginning of the year, the loss for the Group would have been £27.9 million and revenue from continuing operations would have been £266.1 million. Included in the £1.3 million of goodwill recognised above are certain intangible assets that cannot be individually separated from the acquired business due to their nature. These items include the assembled workforce.

10.   EVENTS AFTER THE STATEMENT OF FINANCIAL POSITION DATE

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