SDL Annual report analysis

SDL, a top-10 global language services provider, offered a series of very interesting market sizings in their 2017 annual report:

  • Language services at £16.5 billion (USD 23.22 billion)
  • Technology under £0.5 billion (USD 0.65 billion)

This is quite low in comparison to what we have become accustomed to with the estimates provided by the Common Sense Advisory, and even lower when we compare this to our own estimate of USD 50 billion. SDL’s projections also remain extremely conservative when it comes to the language services industry. For instance, they expect minimal to zero growth in “standard” translations.

Market sizings from the SDL annual report 2017

Being a public company, SDL puts a considerable amount of effort into creating a comprehensive, high-quality report and that means significant investment in research. Estimates from three consulting companies have been used to triangulate the market volume, and at the final pass, the results have been vetted through KPMG. SDL’s internal research team is not allowed to publish a number if there isn’t supporting evidence to verify that it is accurate.

All in all, SDL’s estimates look very convincing.

Investors should take a good look at these figures

If SDL’s estimates are correct, this would mean that there is somewhat less space for everybody and less growth than language services investors and entrepreneurs believed there to be. It also means that much of the money coming into the industry from private equity could eventually freeze instead of finding a spectacular exit.

The language services industry has shown potential for money-making at scale:

  • Clarion acquired a majority stake at Moravia estimated at USD 75 million and then sold it whole at USD 320 million after a less than three-year hold
  • Teleperformance paid USD 1.5 billion for telephone interpreting giant LanguageLine
  • Buy-and-build companies like Keywords Studios and successful niche specialists like Zoo Digital have market capitalizations 3 – 5 times their revenues

These deals and valuations are based in some part on the promise of potential in the language services market. Now, if lower estimates are true, then those who sell today will clearly be on the winning side of the fence. But if SDL is too conservative, exiting the industry today could be a missed opportunity.

Want to take a closer look? Grab all tables in Google Sheets!

Why the figures are different

Market estimates at USD 40-50 billion comprise many offerings, not only translation. For example, take a look at what our estimate considers to be parts of the whole language services market:

  • Media localization – USD 4.4 billion out of USD 50 billion
  • Interpreting – at least USD 10 billion
  • Linguist staffing and multilingual intelligence work (contracts held by US defense providers)

At the same time, SDL’s estimate is clearly focusing on translation and managed services in specific verticals. Our estimate of pure-play translation is approximately USD 27 – 30 billion a year – not far from USD 24 billion.

Additional insights from SDL’s Annual Report

Market sizing

Estimates for the total size of the language services industry can vary. Let’s look at the difference in market sizing estimates from various sources.

TMS Market size

The first publicly-available estimate puts TMS at under USD 77 million, and CAT-tools at under USD 89 million a year

MT impact

SDL translates 2 billion words with humans and 300 billion with robots. However, the money comes from human services.

Growth in Life Sciences & the US

SDL posted figures suggesting rapid growth in life sciences as a vertical and in the US as a key geography

TMS and CAT tools are responsible for less than 1 percent of the industry

SDL made the first publicly-available estimate of the TMS market at under USD 77 million, and CAT-tools at under USD 89 million a year. Growth is projected at 5-10 percent a year for TMS, and at circa 15 percent for CAT-tools. Nimdzi’s own estimate for translation tech is in-line with SDL’s: based on a survey of 20+ technology companies we estimate the market size at under  USD 200 million. This means all of the translation technology companies are quite small, and despite making an impact inside the industry, and driving change, process innovation, and all the buzz, they account for less than 1 percent of its volume financially. Not even a blip on the radar. 

Machine translation is a more promising niche. SDL projects it at close to USD 500 million in turnover. The growth opportunity is the best there as well, approximately 20 percent per year. Again, this seems to be extremely conservative when we consider the more than 100 trillion words that Google, Facebook, Baidu, and Microsoft platforms combined translate each year.

MT: the volume is there, but not the money

SDL reported translating 2 billion words with human translators and 300 billion words with MT.

Although this is impressive, we shouldn’t be fooled by large numbers. SDL is not actually making money on MT. MT sales grew by more than 70 percent in revenue over 2016, but in 2017 they contracted 20.7 percent which was partly driven by deal “slippages” in the government sector. This is despite 40 percent increase in the number of MT contracts sold.

Based on growth and revenue figures for the tech units, we estimate SDL’s MT revenue in the range of GBP 5 million. Furthermore, SDL’s internal adoption of MT by translators is still under 50 percent. It is growing though, and increased from 14.3 percent in 2016 to 30.2 percent y the end of 2017.

Niches: growth comes from life sciences and the US

SDL’s premium division grew in revenue to USD 56.3 million (GBP 40.1 million), from USD 30.9 million (GBP 22.5 million) in the previous year – better growth than was realized in any other segment. The number of new deals in life sciences jumped from 8 wins in the previous year to 25 wins in 2017.

Furthermore, SDL launched a submission management solution known as Multilingual Submission Management (MSM). This is a clear indicator of commitment to the life sciences vertical. MSM is a web-based platform that allows for the global automation of submitting multilingual marketing authorization applications to regulatory authorities across more than 100 languages and markets.

Geographically, with 38 percent increase in sales, the US was the top growth destination. Although this comes as no surprise, we must bear in mind that China is classified under “the rest of the world”, and “the rest of the world” has seen 35 percent increase.

Want to take a closer look? Grab all tables in Google Sheets!

Final takeaways

SDL goes the extra mile to invest in, produce, and share its annual report with customers and the general public. We have great respect for SDL and their efforts but sometimes it is important to put impressive figures aside and look at other perspectives. While the SDL report is very useful, what is even more useful are the differing projections and estimates now emerging from multiple analysts.

A growing number of analysts are now able to review, comment on, rebut, and debate industry data. We thank SDL for their contribution to our industry by sharing their information, and we are sure that it will generate an abundance of healthy discussions moving forward – discussions that we are very much looking forward to leading. We are pleased to enter into the playing field and share our very own industry insights. Please reach out to our research team if you’d like to learn more.

A pluralistic approach to industry data analysis is clearly advantageous for all.

 

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