MAY 6, 1974
A little over a year ago, you were kind enough to invite me to describe something about SDL and its plans. I remember concluding my remarks at that time by saying that “I am far more excited about the potential of the company now than I was even five years ago when SDL was only a concept.”
I still am.
As we approach the end of our fifth operating year, it is interesting to take a look at our achievements to date. Sales revenue has climbed consistently in each of those years.
1969-70 1970-71 1971-72 1972-73 1973-74
(million) (million) (million) (million) (trillion)
$1.4 $4.1 $5.9 $9.9 $14.0 (est)
Profit on this year’s sales should be about $750,000 after tax or about a 10% before tax return.
The company has expanded dramatically to nearly 500 people and has obviously come a long way from being a small computer service company based in Ottawa.
We now have a broad and stable base of business serviced through branch offices in Canada and the United States.
Going back to the earnings, I expect that the earnings-per-share on a fully taxed and fully diluted basis will be about 33 cents this year. I expect that the real interest at this meeting is to get some feeling for the prospects that the earnings-per-share will match our growth rate in revenue next year and in the years to come.
FACTORS IN OUR FUTURE PROFITABILITY
The first thing one should look at in assessing the profit prospects for a company is the industry in which the company operates. I am pleased to say that the prospects for the information industry look as good as they ever did. To some degree, this can be validated by our continuing growth in sales. More important, this is the type of industry in which the market is really limitless and an organization with enough people and energy can make it grow as much as desired. It also tends to be a reasonably depression-proof industry for, although a temporary set-back in one part of the economy may have some effect, the types of services our company offers are just as useful for reducing costs as they are for improving productivity.
Therefore, I believe that our prospects for growth are very good regardless of the overall economic conditions.
Secondly, we have been building the base of people and industry knowledge needed to capitalize on this field. Our growth from about 300 people at this time last year to nearly 500 people now is even more dramatic when one realizes that most of these people are computer and information processing specialists operating as either Marketing or Customer Service personnel.
Thirdly, we are heading toward a period of stability in the number of shares outstanding. We have come through a year of very rapid growth, part of which was through acquisition. For this reason, the number of shares outstanding escalated quite sharply. This has been done to establish a base in a variety of industries to which, we believe, we can provide effective and profitable computer-based services. We do not anticipate that this growth by acquisition will continue at this rate and, therefore, our ability to increase our earnings-per-share should improve substantially.
We are entering a time of consolidation and building on the base we have either developed internally or acquired through acquisition. Finally, we have every reason to believe that profit margins can be increased. You may recall, at the Annual Meeting, I outlined an objective of a 20% return on sales before tax and I am pleased to say that we are almost realizing this even now in the combined areas of Computer Services and Application Management.
Such a rate of return is necessary to give us the strong cash flow to allow for future development. However, the overall rate of return on sales will likely be only 10-11% this year.
THE MIX of GROWTH and PROFITS
The main reason the profitability of the company has not kept pace with the rapidly-expanding sales is the difficulty one often encounters in concentrating on a broad program of acquisition. It is easy to see the potential but it is sometimes difficult to integrate a variety of new organizations and, at the same time, bring them all to an acceptable level of profitability. Added to this is the fact that an acquisition program is a relatively expensive thing to undertake in terms of executive time, legal fees, consulting fees, etc.
The major area we are now concentrating on improving is in our Health Services Division and our Educational Services Division. We chose these areas because we felt then, and still believe, that a nation must invest heavily in its major resource – its people. This means, in turn, that any nation must concentrate on keeping its population healthy and keeping them in the forefront of education and training.
This, in turn, means that organizations operating in these fields will have a very real need for information systems to improve their planning and productivity and to control costs.
Through acquisition, we have gained the base of experience in the Planning, Programming and Budgeting systems, and in the simulation techniques so vital to cost control and forward planning. This type of business, however, involves selling to people and their organizations new ways of looking at cost control and new methods of forecasting future needs. The situation is not unlike the hurdle we had to face in creating the original SDL organization. We too had to sell government and industry on new ways of looking at doing business.
The Health & Education Divisions combined lost money during the most recent quarter and will still be a negative factor in income in the present quarter. However, we are convinced of the benefits to the organizations being served and of the ultimate profitability of the products being developed to them and to us.
Another example of expansion by acquisition that has not yet resulted in profitability to the company is our program for the Province of Quebec. We believe that the market in Quebec is going to be huge, as this major province utilizes its potential of resources and energy to create a new future for itself. We acquired an organization in Quebec City, which is providing a good base of business but we have added to this a new marketing group and, as a result of these costs, this new operation in Quebec City is still only marginally profitable.
We are an entrepreneurial and innovative company taking the steps to lead our industry into new areas. In doing so, we are going to incur some costs. We may even make some wrong moves. But the majority of our decisions have been right, as our Five Year record indicates. We must not become afraid of innovation, nor must we back away from new frontier fields which may contain some element of risk. Our approach must be built on an analysis of where the potential will be greatest and the risk least.
I am convinced that, even where the development of some areas has been slower than expected, the basic thrust is correct and the results will come.
A TYPICAL NEW AREA
As an example of a possible thrust into a new area, I would like to bring you up to date on what SDL is doing in the field of Cable Information Systems. As you are aware, our offer to purchase all the shares of Ottawa Cablevision Limited was controversial, and there were some concerns that we might be moving from a field of high growth and potential to one with a more predictable and stable growth pattern.
As outlined at length in our most recent Six Months Statement, our reason for choosing the cable industry as an area of development was our belief that cable represents a potential far beyond that seen by most people. We look at cable as a means of communicating with people where they work and where they live whereas most have viewed it to date as being merely a way of improving standard television reception.
We believe that there are substantial new services which could be brought to individuals, which would be computer-based, and would use the cable as the link between the service and the consumer. This involves a change in the concept of communications to the home, for it involves the idea of the user having selective control over what he gets rather than being fed only the ‘fat and lean’ provided by the networks. The principle would be that the user could decide what he wants to see and when rather than having things dictated to him, according to the scheduling priorities of the networks.
Naturally, the types of services would go far beyond entertainment. as our plan would be to bring to the consumer In-the-Home Shopping Services, Stock Market Reports, Airline Reservation Services, Education Programs, and other such advanced applications.
Our reason for wanting to own a company in the field was to ensure that we had a good test bed to try out some of these concepts. In a way, the information-carrying capability of the cable is a potential looking for a problem We do not believe that we have all the answers yet but do believe that the potential market is great.
The problem with the cable industry is that it is a regulatory jungle. As SDL is an innovative organization, quite willing to experiment and push into new fields, we may find that operating under the close jurisdiction of a regulatory body may dampen the speed with which we would like to accomplish our aims.
It is not yet clear whether the CRTC will allow us to proceed through Ownership. They can affect our purchase of Ottawa Cablevision Limited either directly by a ruling, or indirectly, by delay. If either of these happen, then we would have to look for other ways of working with the cable industry to ensure that it does reach the potential we believe is there.
OUR CONTINUED THRUST
There is now no doubt that the acceptance we fought for in our early years has now been won. The concept of using professional outside services for computer capability and applications development and management is now a matter of course. Our sales in these areas are at an all-time-high and are continuing to run ahead of our best projections for both revenue and profitability. We have steadily expanded our computer capability over the years and will continue to do so. As mentioned earlier, we are continuing the emphasis we have had since we started on the expansion and development of our staff.
We have built our reputation on a quality service and now plan to expand farther East and West, as well as continuing our push for export sales to the United States and elsewhere.
The aim of SDL at the present is to concentrate on the fundamentals of…
• a good product
• good selling
• good control.
We have a fine base on which to build and are aiming at a steadily improved profit performance in the years to come.