Innodata Inc (INOD) 2008 Q2 法說會逐字稿

Good morning, and welcome to the Innodata Isogen Second Quarter 2008 Earnings Release Conference Call. Today's conference is being recorded. At this time I would like to turn the conference over to Vice President of Marketing, Mr. Al Girardi. Please go ahead, sir.

Thanks, Amy. Thank you for joining us for our second quarter 2008 earnings conference call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen, and Steve Ford, our Company's Chief Financial Officer.

Statements made during this conference call and answers to your questions are intended to provide abbreviated, unofficial background to assist you in your review of the Company's press release and SEC filings. In addition, there may be some forward-looking comments regarding the Company's operations, economic performance, and conditions. These forward-looking statements are made pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. The words believe, expect, anticipate, indicate, point to, and other similar expressions generally identify forward-looking statements, which speak only as of their dates.

These forward-looking statements are based on the Company's current expectations and are subject to a number of risks and uncertainties, including without limitation, the primarily at-will nature of the Company's contracts with its customers and the ability of customers to reduce, delay, cancel projects, including projects that the Company regards as recurring, continuing revenue concentration in a limited number of clients, continuing reliance on project based work, worsening of market conditions, changes in external market factors, the ability and willingness of the Company's current clients and perspective clients to execute their business plans, which give rise to requirements for our services, difficulty in integrating and deriving synergies from acquisitions, potential undiscovered liabilities of companies that Innodata Isogen acquires, changes in the Company's business or growth strategy, the emergence of new or growing competitors, and various other competitive and technological factors, and other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission.

Actual results could differ materially from the results referred to in these forward-looking statements. Along with these risks and uncertainties, there can be no assurance that the results referred to in these forward-looking statements will occur. We encourage you to read the risk factors described in Innodata Isogen's various SEC filings for an understanding of the factors that may affect the Company's businesses and results. Now I'll turn the call over to Jack.

Thanks, Al. Good morning, everybody. Thanks for joining us today. We're exploring a slightly different format for this call. Certainly appreciate hearing any feedback you might have on that.

During today's call Steve Ford will actually kick things off with a review of second quarter results, and then I'll follow Steve, providing some perspective highlighting a few of our accomplishments during the second quarter, and then talking about our priorities and our outlook for the second half of the year. After that, we'll open up the call for questions. Steve?

Thanks, Jack. Good morning, everybody. Thanks for joining us. As Jack mentioned, to kick things off today, I'm going to walk you through our second quarter results.

We'll look at changes in revenue and cost, changes in SG&A, cash flow from operations, and we'll review the balance sheets. I'll conclude with an overall summary of the financial results and some general comments on M&A. Now let's take a look at the numbers.

Start at the top with revenue. In the second quarter of 2008, revenue was up 9%, or $1.5 million over last year, climbing from $16.4 million to $17.9 million, but was marginally lower by 3% from the prior quarter revenue of $18.4 million.

Looking at the year so far, revenue was up 25%, or $7.2 million, rising from $29.1 million on June 30, 2007, to $36.3 million at June 30, 2008. After taxes, we earned $36,000 in the second quarter of 2008 or less than $0.01 per diluted share, as compared to earnings of $861,000 or $0.03 per diluted share, in the second quarter of 2007. On a year-over-year basis, our net income, after tax, increased by $650,000 from $219,000 in the first six months of 2007 to $869,000 in the first six months of 2008.

We customarily separate our revenue into recurring and nonrecurring categories. Recurring revenue consists of services that we anticipate a client will require for an indefinite period, and in contrast, the services for a specific project generate revenue that we regard as nonrecurring.

In the second quarter of 2008, approximately 71% of our revenue was recurring, and 29% was nonrecurring, compared to 67% and 33%, respectively, for the similar period in 2007. Year-over-year, the $7.2 million increase in revenue reflects a $4.8 million increase from recurring revenue and a $2.4 million increase from nonrecurring project revenue.

Examining the revenue for the sequential quarters, the decrease of $0.5 million is primarily attributable to nonrecurring projects that reached completion. Nonrecurring revenues declined by $1.3 million, which was partially offset by an increase in recurring revenue of $800,000.

Now let's take a look at direct costs and SG&A. Direct operating costs were approximately $13.8 million in the second quarter of 2008, up by 16% from $12 million in the second quarter of 2007.

The increase in direct operating cost is principally attributable to the impact of a decline in the value of the U.S. Dollar, along with higher operating cost in support of increased revenue. Direct costs as a percentage of revenue were 77% in the second quarter of 2008, as compared to 73% in the second quarter of 2007.

As we do incur a substantial amount of cost overseas, any weakening in the U.S. Dollar against the currencies of the Philippines and India, where we have the majority of our employees and facilities, negatively impacts our results.

Year-over-year in the second quarter, our direct operating cost increased by $800,000, again principally the result of a weakened U.S. Dollar. Excluding the effects of foreign exchange fluctuations, direct operating cost as a percentage of revenue was 73%, which is in line with the similar period in 2007.

As discussed previously in our conference calls, we have instituted hedging programs to mitigate the exposure of fluctuating future cash flows and have entered into foreign exchange forward contracts.

Any increase or decrease in the fair value of exchange rate sensitive forward contracts would substantially offset the decrease or increase in the fair value of the hedged, underlying asset or liability. In recognition of this continuing economic currency challenge, we are actively seeking greater expertise from an external foreign exchange advisor.

In looking at the sequential quarters, direct operating cost as a percentage of revenues went up to 77% in the second quarter of 2008, from 73% in the first quarter of 2008. The increase in direct operating cost as a percentage of revenue is primarily due to project wind downs and startups.

Now, comparing the six months ended year-over-year, the direct operating costs have gone up by $5.2 million or 24%, to $27.2 million in 2008, from $22 million in 2007. The increase is attributable to approximately $2 million in foreign exchange losses and increases in compensation costs and other costs in support of the increased revenue.

Excluding the $2 million impact of foreign exchange, direct costs as a percentage of revenue were 70% of total revenue for the first six months of 2008, compared to 76% in the similar period in 2007.

Looking at SG&A, you will note that it has gone up by $400,000, from $3.5 million in the second quarter of 2007 to $3.9 million in the second quarter of 2008. As a percentage of revenue, however, SG&A has remained flat year-over-year. The increase in SG&A principally reflects increased sales and administrative payroll, payroll related costs, and professional fees.

For the six month ended June 30, 2008, SG&A has gone up by $1.2 million or 17%, in 2008 from the same period a year earlier. This increase in overall SG&A reflects the increase in payroll costs as well as increased professional fees and other costs incurred for compliance with Section 404 of the Sarbanes-Oxley Act.

In comparing sequential quarters, SG&A expenses have come down by $250,000 in the second quarter of 2008. This is due to decreased professional fees and other costs incurred for compliance with Sarbanes-Oxley in the preceding quarter. We are working on several cost control measures to lower our SG&A expenses.

In regards to taxes, the Company has established a cumulative evaluation allowance, due to net operating loss carry forwards, or NOLs, of approximately $12 million. Once we achieve several profitable quarters for U.S. tax purposes and have satisfied other criteria, we may be in a position to begin recognizing the NOL as a tax benefit. In addition, certain overseas income is neither subject to foreign income taxes, because of tax holidays granted to us, or not subject to tax in the U.S. unless repatriated.

Now let's turn our attention to the balance sheet and cash flow. Our cash flow from operations was $4 million in the six months of 2008, which compares to a use of cash of $900,000 in the similar period of 2007, thus representing a significant increase in cash from our operations.

We ended the quarter with $15.3 million in cash, which is an increase of approximately $0.5 million from the end of 2007. This increase of $0.5 million is after reflecting the repurchase in the quarter of 430,000 shares of the Company's common stock for approximately $1.4 million, part of the stock buyback program authorized by our Board of Directors. Talk more about the buyback program in a minute.

Cash balance of $15.3 million as of June 30, 2008, represents a $4.1 million increase over the balance at the end of Q2 2007. Our free cash flow in the six months of 2008 was $2.4 million, which is the result of subtracting $1.6 million of capital spending from the $4 million in cash flow from operations.

During the 12 months we anticipate that capital spending for our ongoing technology equipment and infrastructure upgrades will be in the range of $4 million to $4.5 million.

In May of 2008 we renewed our line of credit arrangement with our bank. We obtained an increase in our line of credit from $5 million to $7 million. We have no obligations outstanding under this credit line as of the end of the current quarter.

In May of 2008 we announced a stock buyback program authorized by our Board of Directors to repurchase up to $2 million of our common stock. We purchased approximately 430,000 shares of our common stock for a total cost of approximately $1.4 million in the second quarter of 2008 and purchased an additional 176,000 shares in July, 2008, for a total cost of approximately $0.5 million.

Commonly accepted measure of efficiency in a repurchase is to compare the average price you repurchase at to the volume weighted average price, of VWAP, for trading in your stock on the days you were repurchasing.

Our average repurchase price was $3.05 a share plus $0.03 per share on commission, which compares favorably to the VWAP of $3.08 per share for the days we were redoing -- we were doing the repurchase. Under the current authorization of $2 million, we have now repurchased 606,000 shares at a total cost of approximately $1.9 million.

In summary, year-over-year revenue grew by 9% in Q2 and by 25% for the six months ended June 30. During sequential quarters, although our revenue declined marginally by 3%, recurring revenue increased to represent 71% of all revenue for the second quarter of 2008.

Income was lower in the second quarter of 2008, as compared to the same period of 2007, primarily due to approximately $900,000 in increased foreign exchange cost due to the decline in the U.S. Dollar.

During the quarter, the Company earned $36,000, or less than $0.01 per share, which is in line with our generalized guidance, generated $4 million in cash from operations in the first six months of 2008, which is significantly better than the $9,000 use of cash that we saw in the first six months of 2007.

In regards to M&A, I continue to see some very good opportunities in the market. We are in a financially strong position, and we will benefit by combining both organic and acquired growth. For the rest of this year and into 2009, I will be more focused on finding and examining M&A opportunities that will help reduce our customer concentration and be accretive to earnings and cash flow.

Thanks, everybody. Let me now turn the call over to Jack.

Thank you, Steve. As Steve outlined, in the quarter we saw positive year-over-year growth. Sequentially, we saw a small revenue dip associated with project cycles, but our second half outlook is for continued growth.

Our primary issue now is earnings, and more particularly, gross margin. We are implementing a plan of attack to deal with this issue. Before I describe the plan, I'll first provide some context.

At the end of 2006, we outlined a plan to create sustainable growth in earnings. We had no growth in 2005 and 2006, as the business was almost completely driven by large one-off digitization projects. Relying on this type of project based work presented serious issues, including uneven cash flows in revenue, unsettling swings in profitability, and poor visibility.

So in 2006, we articulated our intention to turn this around and achieve sustainable growth using a two-pronged plan. First, we would mitigate -- or migrate from digitization to knowledge process outsourcing, or KPO, which we predicted would bring recurring revenue and better margins. Second, we would put in place a broader sales effort that was configured around KPO.

Our results in 2007 and 2008 reflect execution of this plan. We increased revenues 65% in 2007, 25% in the first half of 2008, and we grew our recurring revenue based from $25 million at the end of 2006 to an annualized $51 million today.

This year we are on track to deliver record revenue, indeed, achieving a revenue level nearly twice that of 2006. From Q2 2007, when we regained profitability, to now, we earned $0.23 per share compared to a loss of $0.27 in a similar period, looking back from that time.

Our challenge now is driving profitability. The projects that we're closing today are priced to fall within our target gross margin range, but we're living with projects that we costed and sold before the first half of 2007, before the U.S. Dollar depreciation hit, and the Dollar depreciation took as much as 15% off the gross margin of these projects.

We see the problem today manifested in our overall gross margin. Our overall gross margin this quarter was 23% compared to 31% in Q3 of 2007, which I'm picking as a point of comparison, because the revenue level was about the same, right around $18 million.

The cost of revenue for the $18 million last year was $12.5 million versus $13.8 million this year. That's a $1.3 million delta. Of this delta, about $0.5 million is attributable to the increased cost of foreign currency needed to pay our rent and people offshore.

Another $0.5 million is attributable to increased costs, and about $300,000 is attributable to a combination of factors, including project mix, project startup costs, and new investments in the business.

Our target, at a minimum, is to get back to where we were in Q3, with gross margins in excess of 30%. If we grow quarterly revenue near term to, say, $20 million, assuming incremental cost of revenue of 50%, our gross margins would still only be at about 26%. So to boost it by another 5% would mean reducing cost of revenue in a quarter by close to $1 million.

If we could take out $1 million from cost of revenue and $400,000 from SG&A, because our SG&A increased by $400,000 this quarter, compared to Q3 of last year, on $20 million of revenue, we could be at about $2.5 million net profit, or $0.10 per share. From that point, continued revenue improvements would further strengthen our bottom line.

Our plan calls for addressing gross margin on multiple fronts. To understand our plan, it's important to identify drivers in gross margin. Our gross margin is a blending of gross margins on individual projects, netted against costs associated with unutilized capacity.

Gross margin declines exponentially with revenue decline, because there's a fixed cost component to our cost of revenue. Gross margin can be further eroded by increases in costs, increases in the cost of buying foreign currencies, and it can also be eroded by project startups, and investments in new capabilities and billable pass-through costs.

In our business, gross margin is elevated exponentially by revenue increases, again because there's a fixed cost component to our cost of revenue. New KPO revenue is especially profitable. Gross margin is enhanced as a cost -- or as the cost of buying foreign currencies goes down. It's also enhanced by increased production automation, decreased fixed production support costs, and price increases.

The upside is that there are a whole host of factors at play at any time, and we have to address them in a concerted plan. So our plan of attack on the gross margin issue has several components. The first is revenue, specifically KPO revenue. KPO margins are higher than non KPO margins, and KPO margins on new work are significantly higher than KPO margins on work that was priced when the cost of foreign currency was lower.

We're seeing project gross margins as high as 40% on new KPO work. For that reason, we are very focused on driving new KPO sales. This will involve continuing to do the things we've done to drive KPO revenue over the last six quarters and to further expand on certain programs and ideas that have demonstrated success.

We'll also plan to add some nonorganic growth to the mix. In terms of revenue growth, it's important to note that our sequential revenue growth from Q1 to Q2 is masked by a couple of wind downs of one-time projects. From Q1 to Q2, we wound down close to $1.3 million of one-time projects, which masks the fact that we actually increased recurring revenue $800,000 from Q1 to Q2.

The second component of our plan, in terms of gross margin initiative, is to drive automation. We need to increase the level of automation we are applying in production processes, using new technologies and tools, both third party and home grown, and streamlined work flows.

We've got a group of engineers at work. We're going to be adding new talent to the mix. We've seen project margins as high as 80% when this team does its best work.

The third element of the gross margin initiative focuses on decreasing nonproduction support costs. We simply need to do more with less.

The fourth element involves foreign exchange protection. We have not done a good job in this area. If we had, we would have had more cushion under us as we hit the currency bump in 2007. We are encouraged by short-term forecasts for both the Philippine Peso and Indian Rupee that indicate that these currencies, relative to the Dollar, will stay at about where they are today for the next four quarters or so. But we are determined to tap a greater level of expertise in this area than we have in the past to help us manage this risk going forward.

The fifth element of our plan to enhance gross margins is selective price increases. We need to obtain price increases for work performed on certain engagements that have become less profitable, or even unprofitable, as the result of the Dollar depreciation.

Our focus is typically on gain share arrangements with clients, through which we reduce unit costs as we develop process and technology improvements. So price increases in our Company are not the norm, but for a select number of engagements, it would be appropriate, and I believe understood by the clients, that we need to increase price.

The last item does not address gross margin, but rather, operating income. We need to ensure that every bit of SG&A we're spending is providing the returns we expect. We're going to carefully scrutinize SG&A increases that have taken place over the past few quarters.

In the second quarter, we secured several new client wins that are worth discussing in a bit more detail. A leading publisher of scientific journals wanted to consolidate copy editing and other editorial activities. This client publishes more than 80 scientific and academic publications on topics ranging from plasma physics to chaos theory. This is a very demanding client with a very demanding subscriber base.

We've been working with this client now for several years, performing discreet production tasks, but they have now turned over to us to take over expanded responsibility for a wide range of editorial and content production activities on all their content. It shows us, for this larger engagement, because of our focus on quality and our subject matter expertise in those topics, we've proven our ability to put to work physicists and chemists who can edit highly technical, complex manuscripts, and we've met the client's expectations on all fronts. This five year engagement is currently worth $1.5 million per year, and we're currently discussing additional production related activities that could drive that value even further.

Here's another important win. A global professional publishing giant decided to outsource the ongoing production processes associated with publishing Dutch language legal and business information. The publisher had been using free lancers in the Netherlands to edit the content and a conversion house to perform the XML encoding, but they wanted to work with a company that could perform this in an integrated process and as an ongoing product maintenance program.

So they asked us for help because of our reputation as a leading provider of legal KPO services and because of our ability to deploy multi-shore teams of resources, in this case, including Dutch speaking editors. This was an important win for us. It is valued at close to $1 million a year going forward, and it will provide us with a powerful reference story for more foreign language KPO work, essentially helping to open a new market for us.

At the same time the KPO market is expanding, the eBook market is also heating up, stoking demand for our production related publishing services. In anticipation of this demand, we invested in developing new proprietary XML based technology to address these requirements.

In Q2 a major publisher of hobbyist and specialty books and magazines had an extensive backlist of books and magazines, which they wanted to convert for publication online and as eBooks. The client also knew that they needed to provide ways of helping their customers find and buy the books and content that they were searching for online.

The client turned to us to provide eBook and book production services, which included providing KPO services to help them create and prepare content for their new ecommerce platform. All told, we expect to generate close to $1.5 million from this client over the next 12 months. This is a great win for us, because it leverages our expertise helping publishers convert material into formats for online delivery, together with our strengths in KPO.

In the quarter we made significant progress on further developing our KPO capabilities. We formulated a cross functional strategy team to work collaboratively with select clients to steer our investments in this area. Just recently, the team met for a three day session to formalize its recommendations. We expect to obtain significant near term payback on our investments in this area.

There is a lot of positive and strong momentum we have going forward. Much of this is achieved as a result of our strong growth, our strong client acceptance, and our KPO vision, and it is this energy and this momentum that we're going to harness to additionally focus on cost control and gross margin improvements.

Our pipeline of new business opportunities is continuing to expand, and based on this pipeline, we are continuing to target our stated 2008 goal of $76 million to $80 million in revenues. Third quarter revenue will probably be up from Q2 in the range of 5% to 10%.

We believe we are realistically forecasting the level of new business. What is not possible to forecast is how revenue from significant late stage opportunities shakes out in the quarters, and this is affected both by the timing of booking and the timing of ramp up, both of which are largely client controlled. At the same time, we are anticipating improved profitability as a result of revenue increases and as a result of cost controlling initiatives.

This controls -- concludes our prepared remarks, and we'll now open the call up to your questions.

Thank you. (Operator Instructions). We'll take our first question from Christopher Beach with Bayshore Capital Management.

Good morning. I was hoping you could reconcile the gross margin performance in the quarter with the fact that both the Rupee and the Peso declined in value versus the Dollar fairly significantly, a range of 5% to 10%, during the quarter.

And then also versus last year, I think the Peso was down something -- or excuse me, the Dollar was down something like 4% versus the Peso, while the Rupee was actually -- declined in value versus the Dollar year-over-year. That, coupled with the fact that on the last conference call, I think you mentioned that you had the ability to raise prices on your existing contracts in response to the deterioration on the U.S. Dollar. Thanks.

Hi, Chris. This is Steve Ford, and I'll take the first part of your question, as far as the currencies are concerned. The comments you made are absolutely correct in terms of the movements of those various currencies.

What we are and what we do and what we work with is that we have a certain specified timing during those quarters when we will actually do our transfers, and those timings are tied into payroll, they're timed into lease payments, and those timings of the transfers are done at rates that exist at that moment.

So even though it may be the case that you'll get some of those movements, as you've described them, in terms of the rates moving, our actual transfer at the current rate of the time of transfer is what we do for purposes of comparison, either year-over-year or sequential quarters. So those are the rates that we were working with as we did those changes.

What I can point out to you, though, is that the movements in those currencies were such that in the second quarter of last year, that you mentioned, those currencies did decline, but for a larger part of the quarter, they were in a stronger position, and they declined at the end.

Whereas in the second quarter of 2008, the strengthening, likewise, took place more towards the end of the quarter, and I'm really referring, beginning and end, towards the timing of our particular transfers, when we transfer for payroll, we transfer to lease payments.

So the bottom line is that it is improving for us, quarter -- year-over-year and sequential quarter. It is not necessarily going to line up exactly with published rates because of the timing issues we have on the transfers. And I hope that helps, and I'll let Jack take the second part of your question.

Sure. Hi, Chris. The plan that we've got in place to attack the gross margin issue is -- has multiple fronts to it. We're going to be driving production automation. We're looking at decreases in nonproduction, in support costs that are cost of goods sold. We're scrutinizing SG&A spending.

We're looking to maintain our sales growth, and that's really important, because as we said, the things we're selling today, we're selling at acceptable gross margins and even higher gross margins than we used to have on a lot of conversion business.

The issue is this -- it's almost like a bad meal that was ingested over a year ago on existing projects, as a result of the Dollar depreciation. One of our strategies, as you've mentioned, is selective price increases.

I don't want anyone to get the idea, though, that any one of these strategies is going to work immediately, that it's just something we can do, and it take effect. It's not. It's going to take work, and it's going to take time. Having said that, I'm very confident that the combination of these factors will address the issue.

Anything further, Mr. Beach?

No, I think that cuts it.

Thank you. Our next question will come from [Joe First] with [First Associates].

Good morning, gentlemen. Congratulations on a good quarter, and I can't tell you how pleased I am to see that you are addressing the profitability problem. You have, over the last two years, really worked on the sales problem and done a very good job in getting the knowledge management work up there to 71% of your business now and addressing the profitability is a key thing, and I'm extremely pleased you're doing that.

I just had one quick question. Have you noticed any change in the way your customers do business than they have done in the past? It might be either beneficial or hurtful to your business. Anything at all on that line?

Well, I guess there are a few different things. In terms of outsourcing, we definitely expect -- and what we're seeing is that a slowing economy leads to an increased demand for offshore outsourcing services. Clients have a greater need and urgency to reduce operating costs. They're looking to shift costs to innovation, so from that perspective, it's a good time to be in the business.

I think that we're probably seeing an increased little deliberateness in decision making, so a little bit of slowness associated with that, but what we actually find is that that, in some senses, works in our favor, because in that deliberation, the conversation is more -- not just about rate, it's about results, and that plays to our strengths and our ability to get things done.

In terms of capital spending, I don't know that we're totally immune from cyclicality of economic slowdowns in that regard, but we worry about capital spend cycle and whether companies will continue to invest in new product initiatives, but right now we're not seeing any slowness there. Something we're watching carefully.

So on the capital spending side, we're not seeing any change in plans. On the outsourcing side, we believe that the secular outsourcing trend is going to work in our favor, and although there's a little bit, maybe, more protracted decision making, it's also much more deliberate decision making, and that works, we believe, in our favor.

And thank you. And one other quick question. As far as any potential acquisitions, I think you've stated in the past that any acquisition you would make would be accretive to earnings. Is that still the case?

That's right, Joe. This is Steve Ford. That's our criteria, and I mean, unless there's some unusually compelling strategic reason that we would want to take an acquisition that in the short run would not be accretive, that's really what our criteria is requiring.

Okay. And are you doing anything special in the next quarter to get your story out to more people? Presenting at any conferences or anything like that?

Yes, as a matter of fact, we're presenting at the Noble Conference that's in Las Vegas on the 18th and 19th of August, and we are going to be -- and I will be, in particular, looking at conferences throughout the fall and the winter, and in addition to that, we'll be doing -- continuing to do what we call non deal road shows, where Jack and I go out and meet with investors that we feel are well targeted to become holders of our stock, and we work in conjunction -- I work in conjunction with Stan Berger on doing those things.

All right. And are you considering buying back still more stock, given the extremely cheap price of it?

Joe, I think that from our perspective, that's something we continually evaluate. We feel good about the recent authorization of $2 million. Certainly, you're right. The stock looks very attractively priced right now. Our role, if you will, and our requirement is to balance the benefit of doing something like that versus the benefit that we can get in value from an acquisition.

So we're going to continually evaluate it. Jack and I certainly have access to the Board in making a recommendation to do that, or their making a recommendation to us, but right now we're not contemplating any further action on that. That doesn't mean we will not do it in the future.

Okay. Thank you. I think you enough cash to do both. Thank you. Thanks a lot.

You're welcome.

Thank you. Our next question comes from [Allen Weber] with [Rubati Company].

Good morning. I had kind of two questions. The first was, when you talked about trying to get some price increases on some existing business, was that -- I guess I didn't quite understand. Was that primarily because of the change in the Dollar, or were those contracts just not priced correctly from the start?

It was entirely because of the Dollar issue.

Okay.

The contracts were priced correctly at the start, and they were profitable when we entered into them and profitable in the appropriate range.

Okay. And then my second question was, you talked about some scientific journal business that you received recently. Just -- can you put any dollar amount to that? What it potentially means for you? And I guess the other part of that question is, was that currently done in-house, or was that from a competitor that you won the business?

That was work that was, at that point, being done in-house with a little bit of domestic free lance mixed into there. The value of that contract is $1.5 million per year. It's a five year contract, and we're now working on further expansions to it that would increase the value from $1.5 million to something more than that.

And when you say to -- increasing that, do you mean by doing additional services for their other products or just doing more just on those journals?

I think it's mostly more processes on that work. We're currently working on all of their content, but there's much more that we can do. We can spread horizontally more, in terms of process.

Okay, great. Thank you very much.

Thank you. (Operator Instructions). And our next question comes from Tim Clarkson with Van Clemens Capital.

Hi, Jack. Hi, Steve. Just wanted to give you -- ask a little bit on the -- I notice that there's been some articles on the Kindle with Amazon, and in general, what's the typical cost of digitizing an average size book? Are we talking $50 or $100 or a couple hundred dollars on a book, or what would be a typical cost?

Tim, if you've got a book you need digitized, send it to me. I'll do it for you for free.

Yes, I appreciate that, but what if I'm a customer, and I've got to pay?

I know. There is no typical book. The architectures for the different devices and the different companies are entirely different. So the cost per book is different, depending on the architecture, and even within a single architecture for a target device, there are different -- a whole menu of different options that customers select, based on the type of book it is and the utility that they want to get from the book in terms of repurposing content for other types of platforms. So it's a complicated question.

What would be a range, though? I mean, what would be a cheap book, and what would be an expensive book?

Yes, I was just going to say, Tim, I don't know that I want to put that out there, because we're really in final stages of some very important contracts there, and from a competitive position perspective, I think it's best that we sort of work those issues.

Okay, good. In terms of this whole issue of digitizing books, it seems like we're finally at a transformational point where there's a device, the Kindle, that seems to be gaining some traction there. Are -- is that what you're hearing, in terms of people's excitement about the possibility of finally digitizing books on a much larger scale?

Very much so. It's interesting. There was sort of an early adoption phase that occurred several years ago, in terms of eBooks, and then we didn't hear that much more about it. Right now it's -- there's a very much mainstream reemergence that is being driven by new technologies and new capabilities, and it's not just the Kindle platform.

There are several of Amazon's competitors who have very interesting and very compelling devices and are very much focused on that market. We're in conversations with a broad spectrum of companies on that very issue right now.

Right. Right. Yes, I noticed that at least in one reference, they were talking about, in some of Amazon's menu, that amongst the books that had been digitized, that already 10% of the books being sold, that had been digitized, were the digital form versus the paper form. And I assume that when they sell these digital books, the gross margins are, at least, are high or higher than the paper formats, right?

That's my understanding. I think it's good business for everybody other than printers.

Right. Right. Okay. Well, thanks. I'm done.

Thanks, Tim.

Thank you. That does conclude today's question and answer session. At this time I'll turn it back over to Mr. Abuhoff for any closing or additional remarks.

Thanks, everybody. Thanks for joining us. Quick recap of our discussion. We're continuing to grow the business. We're emphasizing KPO. We've got a strong pipeline in place. We continue to target $76 million to $80 million for the year, and we anticipate that 2008, taken as a whole, will yield another year of record revenue.

At the same time, we are anticipating improved profitability in the second half, based on a number of factors, and that includes improved operating leverage from well priced new business, gains in operational efficiency [in] a select number of possible price adjustments, where and when it makes sense.

Key is here that we're very focused on profitability. We're focused on profitability the way we were focused, with the laser beam focus, on revenue a few years. Moreover, we believe we've got the right plan in place to address margins. So very much appreciate your continued support, and we look forward to being with you next time. Thank you.

Thank you. That does conclude today's conference. Thank you for your participation, and have a great day.

Additionally, the replay will be available beginning today, August 7, 2008, at 1:00 p.m. Central Time and end on September 6, 2008, at 1:00 p.m. Central Time. To access the replay, please dial toll 719-457-0820 or toll free 1-888-203-1112, and use confirmation code 1037478. Thank you very much, and have a great day.