Sounding like a salesman for LISA, Porter Goss, Bush’s choice as his new CIA director, stated in Congressional hearings, “We need to have people who can speak the language, spot the people, blend into the clutter and understand what motivates people in those cultures…” The U.S. government is desperately short of linguists, with the CIA employing only twelve Arabic speakers prior to 9/11. The hope was that the Titan contract would help solve this issue.

Challenging Titan and INSCOM was a one-person translation shop in Delaware.

But challenging this mammoth defense contractor and INSCOM (U.S. Army Intelligence and Security Commission) was REM Holdings, which, according to news accounts was a one-person translation shop in Delaware. It hired a lawyer to pressure the U.S. Army not to award the contract since small businesses such as itself had been left out of the competition.

The Army agreed to delay handing out the contract. Bloomberg News Service added that the U.S. General Accounting Office, which was hearing the proposal, recommended that the contract award be cancelled and redone with new criteria. In a 13-page letter sent by REM’s attorney, the latter stated that the Army contended that a small business would not be able to perform the contract, partly because, “Small businesses would not have the necessary personnel, materials and cash resources to support the enormity of the operation, nor would small businesses be able to respond to quick reaction tasks or be capable of screening and hiring 5,000-plus linguists with the required security clearances…”

A smaller contract was the result, but Titan still got the business.

“The above assertion is invalid,” noted REM’s attorney. “Small businesses currently supply thousands of linguists throughout the world.” But on September 20, INSCOM awarded Titan a six-month contract with a three-month extension to provide language support. If all options are exercised, the contract is worth US $400 million. A smaller contract was the result, but Titan still got the business.

With U.S. government demand, you would hope that market rates would go up as resources are stretched.

With this government demand in the U.S., you would hope that market rates would go up as resources are stretched, and an increased appreciation of languages seeps into the marketplace. Nonetheless, the government has been offered opportunities from many well-known big firms such as TRADOS and Bowne, along with offers from smaller ones such as Comprehensive Language Center. But Smith Yewell, President and CEO of Welocalize, believes the expense of trying to get the business is not worth the rewards – indeed, you have to become a defense contractor almost to be in the mix. And according to Smith, “You’re not going to get called unless you are in the mix.”

Meanwhile, over at the European Commission (EC), the language budget for 2005 will approach € 1 billion. There are numerous individual groups within the Commission that are mandated to support cross-language documentation, web services and interpretation services. The largest group is the DGT, the Directorate General for Translation. The DGT is now the largest translation services group in the world. It currently produces approximately 1.5 million pages a year covering twenty languages, with the number of pages projected to increase to 2.5 million pages in less than two years. Approximately 35% of the DGT’s production is outsourced. The European Parliament is the second largest language services group in the EC, producing more than 700,000 pages in twenty languages, with approximately 30% outsourced.

So what does all this portend for the language market in general? Don De Palma of Common Sense Advisory makes this observation, “Barring the introduction of another disruptive technology like the web, the translation and localization supplier market cannot sustain high growth rates of 25% or more per year for the top players. Language services providers must improve their marketing, productivity and ability to execute increasingly complex work – engineering, adaptation, system testing, content creation, linguistic quality assurance – that firms want to outsource. These are critical issues for most companies that dwarf their translation and localization plans.”

Public Companies (primarily serving the private sector)

Most of the big players seem to have done well via several different strategies.

SDL

SDL (Reuters:SDL.L.) reported, that for the six months ended June 30, operating profits before goodwill and intangible asset amortization was up 42% over the previous year. Turnover reached £30.7 – up 45% from 2003.

Teather and Greenwood (T&G) is a securities brokerage in London that follows SDL. In an analysis of SDL’s recent past and its future, dated September 10, T&G noted:

“Price erosion offset by margins uplift. While interim revenue was impacted by severe pricing pressure within the localization market, the fact that gross margin increased during the period underlines the tremendous pricing flexibility that SDL’s product and service offering bestows… This will come through, firstly, in increased seeding of the customer base with workflow product, which generates an estimated gross margin of 46-48%. And additional KbTS solution sales, with gross margins of 50%+. This compares with an estimated 42% gross margin generated from pure service revenue.”

T&G also made the following observations

• 39% of SDL’s 2004 sales came from the U.S., 36% from the rest of Europe and only 8% from the U.K.
• By 2006, turnover should be 76 million pounds, with a profit of 8 million.

SDL is rated a buy with the share price at around 160 pence.

Lionbridge

Lionbridge (LIOX) was also out courting the analysts at a conference sponsored by Roth Capital Partners. During the conference, it profiled itself as a company offering “global outsourcing services” which center on globalization, testing, development and maintenance. Its estimate for 2004 revenues is US $160-170 and 2003 adjusted income of $0.14/share, rising to $US 0.31 in 2004.

You have to love the stock message boards. In Lionbridge’s case, one investor stated that if John Kerry becomes president, it would hurt Lionbridge, since outsourcing will not be as popular. A more reasoned investor noted, “… You invest in a company based on its core strength. And Lionbridge is just entering its peak years. If you do short LIOX, I welcome the extra money that will come my way from that transaction.”

The message boards also noted that Rory Cowan, Lionbridge’s chairman, also bought US $1.25 million of LIOX stock in August at US $7.27 a share. It had been trading at around US $8.00 a share and then fell to around six in what someone described as “pre-election jitters.” Also, Lionbridge will announce a lower than anticipated quarter as companies await U.S. election results.

Bowne Global Solutions

It’s a little harder to follow Bowne Global Solutions, as it is part of a larger company, Bowne (BNE). Second quarter revenues of US $57.4 million are down from the previous year, as was the segment profit of US $3.4 million. The official word from Bowne was that “BGS results were impacted by delays in client projects that are expected to begin in the third and fourth quarters, and a decline in interpretation work due to a reduction in the number of cases for the Department of Justice.” This is an amazing statement, given that Titan is getting work with no history in the field, while experienced firms like Bowne aren’t called. We will dig deeper into this for our next column. Bowne’s stock is trading at around US $14 a share, and 2004 sales are predicted to come in around US $230-$249 million, with $14 to $18 million in profit.

Systran

Systran (Bloomberg: SYST NM) released its First Semester 2004 Interim Report, stating sales of € 5,791,000, up 9.8% from the previous year, and operating income of € 1,757,000, up 21.7%. As for the rest of the year, Systran notes that “its new version 5” release is expected to have a positive impact on its Software Publishing Unit during the third and fourth quarters. In addition, it plans to launch new online stores, each available in a language other than English, in an effort to further extend the company’s online sales reach.

Alis Technologies

Traveling from France, Systran’s home, to Canada, we noticed that a well-known name in the localization business, Alis Technologies, was acquired by Nstein Technologies (TSX-V:EIN-News). These are the highlights in a financial release from September 3:

• Alis restructuring completed: Mercury partners and I.U.GO Ventures have invested approximately US $3.5 million in Alis on behalf of European and Canadian investors. Alis has $2.7 million in cash and a net value of $2 million. Its only long-term liability is US $750,000 in debt repayable over ten years in annual installments, based on a percentage of cash flow generated by Alis’ activities. Alis is expected to generate US $4 million in revenues over the next twelve months, with profitability forecast at 15%.

Nstein stock is now trading a CDN 0.25 a share.

Private Companies

Every private company we have talked to, from ENLASO to PH Brink to Welocalize, all report that sales are up. PH Brink ended the year with sales up 56% from the previous year. TRADOS, with headquarters now in Silicon Valley, reports sales to be substantially up and even confirms that the U.S. Defense Department is one of the reasons. However, it is particularly pleased to have a 25.5% increase in enterprise sales.

Jochen Hummel, TRADOS’ Chairman, notes that global expansion and the new EU Member States are all part of the growth. Interestingly, the company brought in a new CEO, and the accolades he received in the TRADOS press releases came from two venture capitalists. And in a growing trend, this new CEO, Joseph S. Campbell, comes from the ranks of software companies.

Meanwhile, the departed CEO and President of TRADOS, Dev Ganesan, now sits on the board of directors for Welocalize, which won the Deloitte and Touche Fast 50 Award for the fourth straight year, recording a 195% increase in sales over the last five years.

Given the volumes of material to be translated as a result of the U.S. war on terror, more investment is going into the MT (machine translation) market. Language Weaver reports that it has completed the closing of its series B funding round of US $4 million. Palisades Ventures of Los Angeles led the round. According to Bryce Benjamin, Language Weaver’s CEO (with whom we visited at a recent MT conference at Georgetown University in Washington, D.C.), “With this new investment, we will grow our team and expand our marketing and sales efforts into the international and commercial markets, which are hundreds of times larger than the government markets and where the need is even greeter for high quality language translation.”