SDL plc (SDLLF) Chief Executive Officer Adolfo Hernandez said that though things did not go according to plan this year at his language translation and content management company, he hasn't any plans to change his strategy.
Hernandez, 47, who was born and raised in Germany, has a three-year plan to turn around the Maidenhead, U.K.-based company that provides translation software and services to help companies adapt their websites and data to other languages and manages other digital content. Since Hernandez was installed as CEO in April 2016, he has worked to refocus SDL in the business of helping larger companies go global with their content.
"I think we can manage -- better than anyone -- global content that has to be delivered globally but executed locally," Hernandez said in a recent interview with TheStreet.
SDL looks at how a company creates content, keeps the content synchronized, manages the content, translates global content locally and distributes it. In the past couple of months, SDL inked deals to enhance integration with Adobe (ADBE) - Get Report Experience Manager, integrated SDL Instant Translation for Live Agent with the Salesforce (CRM) - Get Report AppExhange, and was selected to power global digital transformations by international airlines, including China Airlines.
"Last year was about diagnosing the opportunities, the challenges, and then starting to execute on the fixes," Hernandez said. "Then 2017 was going to be the year of execution of all the fixes, and 2018 was going to be the year that we ran it fully on the new model."
But on Aug. 1 SDL released its interim results for first six months of the year, which showed things were not going as planned. "Sales growth has come ahead of the operational efficiencies we are investing to deliver and has incurred higher costs of servicing, predominately through the use of freelancers," Hernandez said in a statement at the time, noting that the company does not expect the impact of the higher costs to be recoverable in the second half of the year.
The SDL CEO said the company with a market capitalization of 447.81 million pounds ($587.8 million), according to Bloomberg data, was a victim of its own success.
"We sold too much," Hernandez said. "We couldn't cope with so much demand in the short-term so it increased our costs." In March, Chinese telecommunications company Huawei selected SDL to power its global digital marketing strategy, and in May Japan's largest airline company All Nippon Airways chose SDL to help support its global expansion plans and reach new online audiences.
"Management was faced with the decision of whether to take on new business with large multinational clients at reduced margins or to let the prospect of building profitable, long-term, blue-chip, customer relationships pass it by," wrote Canaccord Genuity analyst Paul Morland in an August research note. "This was an easy call."
The firm raised its rating on the shares to Buy from Hold, but lowered its price target to 590 pounds from 660 pounds. The consensus rating amongst analysts for SDL stock is Buy at 57.1% and Hold at 42.9%, according to Bloomberg data. Shares of SDL, which trade on the London Stock Exchange, closed at 543.50 GBP on Friday.
There is, however, a silver lining in the interim results, said Hernandez. "The fact that we were able to grow way more than anybody expected validates the strategy," he said. "Customers value what we are building and want to buy it," added Hernandez, emphasizing that the three-year strategy is not changing.
Forrester Consulting studied the demand for a global content operating model on behalf of SDL in June 2016. The firm found that nearly half of the enterprises surveyed are planning to move to a global content operating model within 24 months, anticipating better brand consistency and improved customer experience. Forrester surveyed 151 business and IT professionals in the U.S.
"Our study found that companies see value in a global content operating model regardless of the number of languages that need to be supported," the Forrester reported stated. "Enabling brand consistency and improving customer experience, coupled with operational efficiencies, are the key drivers for this shift."
With this demand for global content, Hernandez said he sees an opportunity to not only transform SDL but also to shape the industry. He would like to see the industry move more toward software- and AI-powered services, which would be a big departure for "an industry that is overly manual." Software- and AI-powered services provide better means to track the lifecycle of content and the click-through rate, which in turn generate data that could be used to drive additional value at companies.
For SDL, North America continues to be a leading market, which is a "reflection of U.S. companies' ambitions to reach global markets," Hernandez said. Going forward, the North American market will continue to be important to SDL, specifically the high-tech industries and consumer-lead industries, such as travel and transportation. And with the recent push toward security and privacy solutions, particularly in light of the Equifax Inc. (EFX) - Get Report hack, the CEO also expects to see a "thrust in financial services."
Cybersecurity is a top priority for SDL internally (it is discussed at almost every board meeting) and also in the way it serves its customers. The company tripled its IT investments and overhauled the way it stores, manages and secures customer information (Hernandez did not provide a specific amount regarding the IT investments). One aspect of the overhauled system is a virtualized translation server, "whereby the [customer's] files never leave the server," Hernandez said. "People would be working remotely on permission-based information without the information actually leaving [the server.]"
SDL is also eyeing the Chinese market, as shown by its deal with China Airlines, and is learning how to be a good Chinese partner while also being a partner to western companies, Hernandez said.
Hernandez also expects SDL to be a "main driver and actor of industry consolidation." Of its peers, just three companies have a market cap worth more than 1 billion GBP, including RWS Holdings PLC (RWSHF) ; six others have market caps in the millions, according to Google Finance. While he did not disclose any immediate plans, he said that SDL does not need to do an acquisition to deliver on the three-year plan. "If we see something that is going to accelerate it, we will do it," Hernandez said. But he still feels that he has all of the components to deliver on the three-year plan.
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