SDL ANNUAL MEETING

PRESIDENT’S ADDRESS

DECEMBER 8, 1976

SDL has a unique record in the computer services industry. We have completed four consecutive years of profitable operation  – a feat accomplished by no other large company in our industry in Canada and very few in the United States.

At a level of $20 million dollars in sales, SDL is among the top dozen or so firms in our industry in North America.

We are also the only major independent firm in Canada in this industry. We built our revenue base entirely on our own without the benefit of any large block of business provided to us by a parent company.

We are the only Canadian company that has built substantial sales in the United States and has a long term commitment to continue this course.

However, the past few years have not been easy. It has been difficult to produce a steady growth in earnings and revenue. I predict that the next few years will not be easy either.

THE INDUSTRY

Projections by outside groups for growth in our industry are optimistic. The Computer Communications Secretariat of the Department of Communications even estimated that the total sales of the computer services industry in Canada could be larger than the total hardware sales by 1985. Such growth predictions, however, are dependent on factors beyond the control of the industry. In particular, growth such as this depends on the availability of enough capital to be able to invest in the productivity improvements that our industry can provide.

To a degree, we are like every other industry in our dependence on the growth of the economy as a whole. Predictions of 20% compound growth over a long period are always suspect in an economy where the Gross National Product is only increasing at 4-5%.

Still, there is a vital need by all industries for better information and better tools to improve productivity. This is our business. For Canada and the United States, future economic survival will depend on our ability to increase industrial productivity. This should provide the opportunity for the industry to sustain a growth rate substantially better than that of the economy as a whole.

I generally believe that a rate of growth in the industry in the area of 20% per annum for the period 1977 through 1981 is possible providing we have a reasonably healthy economy.

Our own projections for SDL are in this area for the five years starting 1977.

Against this background, let us take a look at SDL itself . . .

WHAT DOES SDL DO?

Every organization needs a ‘mission’ and ours is . . . “to be the organization that others can depend on to meet their continuing information systems needs.” Our approach is to . . . “help our customers by providing services of high value based on expertise in computer-related technology.”

Our aim in all of this is to . . . “provide a satisfactory return to our shareholders.” I define this more specifically as being . . .

•  to provide a steadily growing profit

•  to pay a gradually increasing dividend

•  to attain sufficient size and market position to ensure continuity of earnings and a reasonable safety of investment

We have done a good job in defining what we should do but have yet to satisfy ourselves or the shareholders that we are meeting our corporate aim.

First, let us look at the kinds of services we provide to help our customers. Our approach is to provide a highly efficient data processing service available over communication lines from our installation in the Systemcentre in Ottawa. This system can be accessed by terminals from anywhere in North America.

To supplement the availability of this computer power, we have gradually been building up a series of services specifically designed to help customers solve their information problems. In one way, we can be thought of as a service organization that will allow companies to buy the components they need to develop a good computer system, i.e. the computer power they require, the people they need to analyze the problems, and write programs, and the general purpose packages to assist them in this process. However, we are also very much in the business of providing total solutions ranging from systems, such as Payroll and General Ledger, to corporate planning models helping our clients to make good use of the data that exists within their organizations.

The trend is toward more ‘value added’ services. Although we will still continue to market computer power to be used by clients with their own programs, we are increasingly taking responsibility for developing complete solutions to clients’ problems.

In a word, we believe that we should be doing more than just providing less expensive data processing. Rather, we are in the business of providing better overall solutions to problems. Our approach is to help customers do things better and not simply cheaper.

We have developed one of the most sophisticated computer complexes in Canada and have done this in such a way that we can balance the computer power very accurately to the current need. Our present system allows us to add or delete computer mainframes as the demand fluctuates and do this in such a way that the process is transparent to the user.

As all our computers are linked, allowing any user to access any of his files from any of the computer mainframes, we have a unique approach to computer services.

We are in the final stages of converting the whole computer complex to IBM’s newest operating system. This is the first major operating system conversion that the company has undertaken since it started in 1968.

We believe that the time and effort put into this change will ensure that we continue to provide our customers with the best computer service in North America.

But SDL is far more than machines. If we are really to solve information problems for customers, we must have the best people in the industry. We have recruited and trained a staff of over 400, many of whom are graduates of universities or colleges. We continue to update this staff with intensive internal training programs in sales techniques, technical subjects, and management development.

This staff is located not only in Ottawa, but in branch offices in Boston, Calgary, Montreal, New York, Quebec City, Toronto, Vancouver, and Washington.

Therefore, we have a fine computer system that can be accessed by users over an extensive communications network. We are creating many aids to help clients develop more effective solutions to their problems. We have an excellent staff with an outstanding technical reputation.

OUR SITUATION TODAY

With all of these factors in our favour, why have sales levelled off and profits declined?

Some of the reasons were outlined in the Annual Report – a major one being that a number of large contracts, principally with the Ontario Government, came to an end in the 1975-76 fiscal year.

There are other reasons for the present sales situation . . .

•  the lack of growth in the Federal Government Market in Canada

•  an overcapacity situation in our industry resulting in intense price competition

•  the general situation in the economy

Over the years, SDL has been very successful in developing the Canadian Federal Government market. Now this market is there for other companies to approach. Unfortunately, much of this competition is now at prices that could not possibly lead to sustained profitability for the offering companies.

The Federal Government has compounded the problem by continually re-tendering work already in the private sector while protecting the internal computer empires that could, most profitably, be tendered. The result is that expenditures on in-house computer installations in the Canadian Federal Government continue to climb at a rate significantly faster than the expenditures for computer services from the private sector.

The Federal Government has not coordinated its approach to the use of government purchasing. The stated aim of the Departments of Communications and Industry, Trade & Commerce is to build a strong Canadian-owned computer services industry. The result of recent tendering practices by the Department of Supply & Services is to force industry pricing to new and unprofitable lows. The industry is further hurt by an apparently deliberate practice of geographically distributing computer services business, thus encouraging the fragmentation of the industry.

The Government cannot have it both ways. If it wants a strong industry capable of competing for export dollars, it must use its purchasing power to this end. It is unlikely that Canada can build a significant computer hardware industry. It would be to the benefit of all Canadians to have a strong Canadian-owned computer services industry.

In the long run, SDL is working to become less dependent on any one market. We have been successfully diversifying. Nonetheless, developing new markets does take time. It also requires some investment.

In the Spring, we established a Product Development Division, organized a new Marketing Department, and set up a Sales Support Department to speed up the development and implementation of new services. You have not yet seen the effect of this, although it is encouraging to note that the commercial sales have been steadily increasing and are filling a good part of the gap created by the declining market in all levels of government.

I am also pleased to note that we have been able to maintain a constant level of cost, despite the expanded emphasis of R & D and Marketing. In fact, our costs for the first quarter were below the costs for the same period last year.

All of our R & D costs and, in fact, all costs at the present time, are being expensed, as incurred.

Despite the increased marketing efforts in the United States and Canada, I still expect that 1976/77 will be a difficult year. In the most recent quarterly report, I mentioned that I felt the year would show no improvement over last year. I now feel that even this is optimistic, as sales in the second quarter are continuing to be weaker than expected. The major problem area continues to be in government sales.

Our first priority is to turn this situation around. I am optimistic that this can be done before the end of this fiscal year but possibly not in time to have a profitable year.

THE OUTLOOK

In summary, the short range outlook is for ‘holding our own’ while we concentrate on getting the revenue growing again.

We are highly leveraged as we have the capacity to handle additional revenue at little additional cost.

We have been prudently controlling costs and building up a very strong financial position. Our working capital has grown to over $8 million dollars. Our cash position is strong.

We know what we have to do. The plans are in place. The product announcements, such as you see here today, are evidence of the results to come. We are really in a transitional phase between being essentially a computer utility service, largely dependent on government business, and being a broadly based computer services company servicing the North American market.

I am confident that we have the plans and resources to resume our position as the growth company in a growth industry.