NOVEMBER 2, 1977
A recent book published about the computer field is called “The Waves of Change.” In it, Dr. Charles Lecht describes the rapid changes that have taken place in computer technology and forecasts even more dramatic changes in this fast moving field.
Small wonder, then, that companies in our field must learn not only to accept, but to capitalize on, rapid change. Over the past few years, SDL has survived many changes in our industry. None, however, have been more dramatic than those which occurred during the past eighteen months.
We can look at these changes in three general areas . . .
Our aim is to turn the changes in all of these areas to our advantage.
As outlined in the Annual Report and in previous reports to shareholders, the market in Canada has changed dramatically in the past couple of years. The Federal Government market, which had grown quite dramatically under an enlightened policy of placing business with the private sector, has now levelled off. The provincial governments, which had at one time placed some business with the private sector, have now withdrawn much of this internally. This happened at the very time when new companies were entering the field. This, in turn, led to an erosion of the price levels in the industry.
These factors, plus the general economic conditions in Canada, caused SDL to have its first loss year in the past five years. As SDL does not have any protected base of business from a parent company, we were more subject to revenue erosion than some of the other companies in the field.
However, even in a difficult year, we were able to maintain a very good cash flow which exceeded 1 million dollars in 1976-77. Our Working Capital grew to over 8.7 million dollars. We ended the year in a very sound financial condition.
I indicated that a company in a fast moving market should be able to adapt changing market conditions to its advantage. I could now outline briefly what SDL has been doing to capitalize on this change.
First, we have diversified our marketing efforts on a geographic basis. This has led to a change in our balance of revenue. Now approximately 20% of our revenue comes from the United States. Another 20% comes from SDL Informatique which operates in Quebec and the Maritimes. This is almost exclusively a commercial market. We have also increased our marketing efforts in Western Canada.
Secondly, we have for some time recognized that one must offer more than computer power. We believe that, in the future, there will be some polarization between a raw computer power product and a value added product.
It is certainly our intention to continue to offer a quality computer services product. This has been an SDL specialty since the start of the company. Our target markets for this type of service will tend to be the medium-to-large scale organizations in Canada and the United States.
The value added part of our business, which we call Application Services, is growing. It now accounts for about 25% of our total business. In this area, we sell solutions to problems rather than simply computer power. As this type of approach is particularly helpful to smaller organizations who may not have the in-house computer expertise to make good use of computer power, we believe that this will broaden our markets considerably in the years to come. It also tends to be a more stable revenue source which is less susceptible to some of the technological changes I will discuss in a moment.
We are reacting, therefore, to the changing market by both broadening our product line and by marketing in new geographic areas. Our approach will be an aggressive one aimed at furthering these two development areas, as well as investigating what might be done to improve market conditions, in general, in Canada.
We believe we are well positioned to take advantage of changes which are coming in the technology. We have one of the most up-to-date computer complexes in North America. We have recently gone through a major conversion to the new IBM Operating System. We have purchased most of the computer equipment we have, taking advantage of lower IBM prices and our favourable purchase option agreements.
We are writing off the equipment over a relatively short period. We are also not capitalizing any of our development costs. This should give us one of the most flexible positions in the industry.
SDL continues to believe that, despite the changing cost of computer cycles, there will for many years be a requirement for very large computers. Many organizations will require access to huge databanks, will need to do more complex planning and simulation operations, will have to use more mathematical approaches to solving problems of energy, transportation, or other areas, and will certainly have requirements for very large file handling.
None of these are particularly well-handled by mini computers. However, we also believe that we can capitalize on the new lower cost of computer cycles by taking a hierarchical approach. We expect that we will be able to offer to our clients . . .
• microcomputers which essentially provide one function to one user
• mini computers which provide several functions to several users
• midi computers which may be on a regional basis and provide many functions to many users
• maxi computers which will provide a very broad range of functions to a very large range of users
At SDL, we have seen many changes in the philosophy of when computer power should be centralized or decentralized. Many of us can remember the IBM 1401 era where decentralization seemed to be the right answer. This was followed by huge computers and people rushed to centralize. Now mini computers seem to be leading back toward a decentralized approach.
We believe we can provide our clients with the best possible solution by balancing their needs to our broad range of available solutions. We do anticipate that we will be moving more computer cycles closer to the clients and this will likely involve our establishing Regional Computer Centres of varying capacities.
Even with the advent of satellite technology, fibre optics, and other communications advances, we do not believe that communication costs will come down sufficiently to make it economic to transmit everything from the client to a single large computer. The growing tendency toward national privacy laws will also have an effect on our ability to do this in the future.
Once again, therefore, we believe that we are taking the right steps to adapt the technology to meaningful new solutions for clients.
Toward the end of the 1976-77 fiscal year, several large organizations showed an interest in acquiring SDL. Bids were received from Crown Life Insurance Company and Sun Life Assurance Company of Canada. As you are aware, a third bid by Coastal Enterprises Limited was successful and Coastal now owns over 90% of the common shares of the Company.
The management of SDL believes that this will also work to our advantage. Capitalizing on the growing markets in the United States and elsewhere and the desire to see the market conditions in Canada improved will require aggressive management and investment. This would have been true had we remained a broadly held public company, or a company with a major controlling interest by one organization. The advantage of the current situation is that we should now be able to take a longer range view towards getting a good return on investment in the company.
The management looks forward to working out such plans with the new Board of Directors.
At this point, I would like to say a word of special thanks to those members who have retired from the Board. They saw the company grow from a standing start to over $20 million dollars a year. Their advice and assistance during this era of rapid growth is much appreciated.
As discussed in the Annual Report, we do anticipate that this year there will be a return to modest profitability. However, depending on decisions and plans of the new Board of Directors, it is possible that the profitability may remain low for the next couple of years, as funds are reinvested in future opportunities.
The management is enthusiastic about the future prospects in this exciting and fast moving field. Initial meetings with the new owners of the company indicate they share this enthusiasm. Together, we are looking forward to a period of aggressive growth, leading to expanded profits in years to come.