SDL and Lionbridge Show Profit in First Half of 2008

This week’s earnings announcements by Lionbridge and SDL were not exactly news, but this is our beat so when news doesn’t happen in the language services industry you’ll read it here first.

SDL

The SDL announcement, in the form of a press release, plays like a highlights reel.  Revenue is up 40%, at £76 million ($148 mm) for the first half year. Organic growth is up 24%, organic growth in constant currency terms is up 16%, but – hey – up is good.

The technology segment doubled in revenue, with strong organic growth and the contributions of Tridion (acquired in 2007) and Idiom (May 2008). We sometimes hear that SDL cannot be fairly compared to traditional LSPs because they are a technology play. Interestingly, the language services business is more profitable (16.5% at the ‘profit before amortization’ level) than the technology piece (13.7%).

The bullet points section of SDL’s press release advertises the “successful integration of Idiom”. In the brief narrative provided by Chairman Mark Lancaster, however, it is described as “meeting expectations”, which is the kind of report card our kids got when they attended a grades-free Montessori School.

Lionbridge

Lionbridge CEO Rory Cowan and CFO Don Muir had the rare pleasure of announcing a profit — $0.02 per share. In contrast to the press release method of the UK, Messrs. Cowan and Muir had to explain their results to a conference call audience and then submit to questioning from grownups who pay attention. It was a friendly crowd today.

Revenue for the quarter was a record $125.5 million. Did we mention there was a profit? The profitability came from below-the-line management of the company’s finances, however, rather than from operating improvements. Lionbridge’s gross margin was down from the same quarter last year, at 31.5%, but that shouldn’t dampen the mood: “last year is in the past”, says Cowan, who prefers to compare the margins to the weaker first quarter of this year.

Lionbridge also reported some interesting developments in the actual running of the business. 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. We see LSPs as primarily sales and project management organizations, so this is a promising product line extension.

The company has also increased the percentage of work handled by its Logoport system from 45-50% a year ago to about 60% now. Getting more and larger projects onto this platform and shunning work requiring hand-crafted project management will be a key to improving Lionbridge’s lagging gross margins. We’re not even hinting that there may be ways to increase the global adoption of Logoport.

Market Reaction

We are not stock market analysts and will probably never get that bigger boat, but it is always fun to watch how markets react. LIOX shares floated up above $3.20 this afternoon – a 72% climb from the nadir of two weeks ago – before settling in to a modest gain of 8% on modest volume.

SDL investors seemed perplexingly unimpressed with the company’s fine results, at least when we looked only at the reaction on the day of the announcement:

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

Stepping back to view SDL’s share price over a two month stretch, however, shows 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