Your Content Their Language SDL plc Annual Report 2010 Contents 1 SDL Overview Our Vision 2 Timeline of Innovation 3 Financial Highlights 2010 4 Operational Highlights 2010 5 Executive Chairman’s Statement 6 Strategic Priorities – How We Delivered Against Our Objectives 10 2 Key Account Growth and Cross Leverage Key Account Growth 12 Cross Leverage 16 3 Geographic Expansion 18 4 Technology Leadership (New Product Innovation) 2010 19 5 Acquisition and Strategic Partnership 20 6 Operational Effectiveness 21 7 Corporate Social Responsibility The SDL Environmental Commitment 22 Community Support and the SDL Foundation 25 SDL Employees 26 Employment Policy Highlights 27 8 Directors and Corporate Governance Directors 28 Operating and Financial Review 30 Corporate Governance Report 39 9 Statutory Information Directors’ Remuneration Report 55 Directors’ Report 63 Statement of Directors’ Responsibilities in Respect of the Group Financial Statements 69 Independent Auditor’s Report 70 Consolidated Income Statement 71 Consolidated Statement of Comprehensive Income 72 Consolidated Statement of Financial Position 73 Consolidated Statement of Changes In Equity 74 Consolidated Statement of Cash Flows 75 Notes to the Accounts – Group 76 Company Balance Sheet 108 Notes to the Accounts – Company 109 Five Year Group Summary 120 Corporate Information 121 Annual Report and Accounts 2010 1 Our Vision Global Information Management helps our clients engage with their customers throughout the customer journey – from brand awareness, to sales and after-sales support – and across multiple languages, cultures and channels. It allows different stakeholders in the organisation to contribute to the customer journey in a consistent and orchestrated way, from content creation and management, to optimising the translation process and publishing content dynamically in multiple formats. 90% of a global business’ Accelerating content is in another language time-to-market MARGIN Building Optimising GROWTH brand equity customer impact Managing Globalisation costs & localisation RReesseeaarrcchh MMaannuuffaaccttuurriinngg SSaalleess SSeerrvviiccee && && && && DDeevveellooppmmeenntt DDiissttrriibbuuttiioonn MMaarrkkeettiinngg SSuuppppoorrtt Global Information Management 2 1 Timeline of Innovation S D L 2010 Acquired Language Weaver and Xopus O Launched SDL BeGlobal v e r Acquired XyEnterprise and Fredhopper 2009 vie Launched SDL Trados Studio w 2008 Acquired Idiom Launched SDL Automated Translation Solutions Acquired Tridion, Pass Engineering and Trisoft 2007 2006 Launched Global Authoring technology Acquired Trados 2005 2004 Launched SDL Knowledge-based Translation System £64m annual turnover, 1200 staff 2003 and offices in 25 countries 2002 Acquired Machine Translation technology Acquired Alpnet and ITP 2001 Opened offshore facilities in China and Thailand 2000 Launched cloud-based translation management system Company floats on London Stock Exchange, 1999 company grows to 280 staff 1998 £10m annual turnover Expanded into Asia, Europe and the US 1997 1996 First VC funding First acquisition – translation memory technology 1995 1994 £2m annual turnover, company grows to 50 staff Company grows to 12 staff 1993 1992 Company founded in Maidenhead, UK, by Mark Lancaster Annual Report and Accounts 2010 3 Financial Highlights Revenue Profit before tax* *before amortisation of intangible assets 10 £203.5m 10 £35.4m 09 £171.9m 09 £29.8m 08 £158.8m 08 £25.6m 07 £117.4m 07 £17.0m 06 £94.7m 06 £12.2m Operating Margins* Operating Cash Flow *before amortisation of intangible assets 10 17.4% 10 £27.1m 09 17.4% 09 £30.1m 08 16.1% 08 £26.4m 07 14.5% 07 £16.0m 06 12.9% 06 £9.9m £203.5m 18% Revenue £35.4m 19% Profit Before Tax and Amortisation 33.54p 19% Fully Adjusted Diluted Earnings Per Share £27.1m 10% Operating Cash Flow 4 1 Operational Highlights S D January SDL announces brand consolidation of its divisions into one L O SDL brand with 5 divisional expertise areas v e February SDL hosted translation systems in the Cloud show record rv level growth ie w March SDL receives top content management award for its web content and structured content technologies April SDL releases its first end-to-end publishing technology for technical documentation May SDL eCommerce division (formerly Fredhopper) launches in the US June SDL launches profile-based marketing and eCommerce solution, SDL SmartTarget and acquires Xopus July SDL acquires Language Weaver, the pioneer in statistical machine translation and launches predictive text for technical communicators August SDL recognized as the leader in Gartner’s magic quadrant for web content management and unveils significant new functionality for SDL Contenta® S1000D September SDL extends leadership in component content management with the release of SDL Trisoft™ 2011 October SDL unveils cloud technology for real-time automated translation with SDL BeGlobal November SDL expands European operations by opening new office in Turkey December SDL unveils corporate video to highlight the benefits seen by global brands in adopting Global Information Management Annual Report and Accounts 2010 5 Executive Chairman’s Statement Dear Shareholder, Asian territories. We introduced several new products to market in 2010: SDL BeGlobal a next generation Summary Performance statistical machine translation technology; SDL Trisoft We are delighted to report a year of strong strategic with enhanced DITA support; SDL Contenta S1000D progress, record revenue and excellent operating in the structured content management space; and we profit performance. In the period we saw a steadily launched SDL Global Authoring Management System improving demand environment for our technology 2010 in Language Technologies. and services. We were particularly pleased with the We made two strategic acquisitions during the levels of cross-selling of products and services achieved year. The acquisition of Language Weaver gives SDL during the year, delivering broader Global Information an industry leading position in statistical machine Management solutions that address our customers’ translation. By further increasing the speed of strategic needs. translation, we believe this acquisition will significantly We increased our strategic investments in 2010, increase the volume of content that companies can accelerating investment in innovation, research economically choose to translate. The acquisition of and development, and supporting our growth in Xopus increases technical content creation possibilities 6 S D L O v e r v ie w by facilitating content creation by non technical authors. Both of these acquisitions further strengthen the SDL end-to-end content management offering. The Xopus business is now fully integrated into our Structured Content Management Technologies business and is therefore reported as part of the Content Management Technologies operating segment. Language Weaver is reported as part of our Language Technologies operating segment which is run as an integrated global business under common leadership. The executive team was further strengthened with the appointment of Mark Reid as Chief Information Officer and Dennis van der Veeke as Chief Technology Officer, both key appointments. Annual Report and Accounts 2010 7 Chairman’s Statement continued Revenue for 2010 was £203.5 million (2009: £171.9 million). Segmental Performance Operating profit before taxation and amortisation We continue to report the business in three operating of intangible assets (“PBTA”) for the period was segments in 2010 as our shareholders find this £35.4 million (2009: £29.8 million) with profit before additional disclosure valuable. Our operating segments taxation of £28.8 million (2009: £24.0 million). Net are Content Management Technologies, Language cash in the business at the end of the period was Technologies and Language Services. £46.6 million (2009: £46.2 million) after net cash Content Management Technologies outflow of £25.9 million due to acquisitions during (contributing £45.0 million or 22% of revenue to the year. the Group and £7.7 million or 22% of Group PBTA) We are pleased to report double digit headline revenue (2009: contributing £33.2 million or 19% of revenue to growth in each of our operating segments, which the Group and £6.4 million or 22% of Group PBTA) bears testament to the resilience of the business Overall revenue in this segment grew by 36%, 16% due to the economic cycle. Headline Group revenue to acquisition, -1% due to foreign exchange and 21% growth comprised acquisition related growth of growth at constant currency. We are delighted by the 4%, a negligible impact due to foreign exchange performance of this segment, which reflects strong and constant currency revenue growth of 14%. cross leveraging from the rest of the SDL Group. We finished the year strongly, particularly in our Web SDL Web Content Management Solutions performed Content Management business, where changes in well. Both Europe and North America had strong organisational structure built positive momentum. second half performance. Structured Content In general, we are confident that the demand pipeline Management made exceptional progress in 2010, with in each operating segment remains robust moving the combination of traditional XyEnterprise strengths into 2011. We have made excellent progress in cross- with SDL Trisoft continuing to be a potent combination selling solutions, the Content Management segment and market innovator. We look to 2011 with confidence in particular, recording constant currency revenue in this business from a position of industry leadership growth of 21%, has been a prime beneficiary of this in technical document Xml publishing, component cross-selling approach. We are very pleased with the content management and SDL LiveContent solutions. two acquisitions, Xopus and Language Weaver, both now fully integrated from a leadership, systems and We were pleased to welcome as clients investing in execution perspective. This rapid integration puts us Content Management Technology, Unilever, Atmel, in a good position to execute our growth strategy Affinion, Fidelity Investments, Saab, United Airlines and aspirations in these businesses in 2011. Virgin Money. Our operating cash flow from operations amounted Language Technologies to £27.1 million in 2010 (2009: £30.1million). We were (contributing £33.9 million or 17% of revenue to unable to repeat the working capital inflow we saw the Group and £3.3 million or 9% of Group PBTA) in 2009 when we significantly reduced receivable (2009: contributing £29.1 million or 17% revenue to days, however our average DSO has been marginally the Group and £3.5 million or 12% of Group PBTA) improved in 2010 with strong exit revenues generating Overall headline sales growth was 17% in the higher receivables. Our profit to cash conversion Language Technologies business of which 8% was due remains excellent. Our balance sheet remains a to acquisition, currency impact was negligible and considerable source of competitive advantage and constant currency revenue growth was 9%. comfort as we have no external debt. At the end of We saw consistent demand stabilisation in the 2010 we had £46.6 million of cash on the balance Enterprise business and solid momentum build in sheet. Given our confidence in future cash generation our desktop business in the second half reflecting and ability to sustain strategic and operational progress our demand generation initiatives and considerable the Board is recommending a maiden final dividend to expansion in China. We have made significant progress the Annual General Meeting of 5.5 pence per ordinary integrating Language Weaver into the Language share. This will not alter our strategy of pursuing strong Technologies business unit. Language Weaver profitable growth but will provide a return to those performance versus equivalent period in 2009 was investors who value a nominal yield in addition to robust and we continue to invest heavily in statistical growth. Our future dividend policy will be progressive. 8