Innodata Inc (INOD) 2008 Q4 法說會逐字稿

Please stand by. We're about to begin. Good morning, and welcome to this Innodata Isogen Fourth Quarter and Year End 2008 Results Conference Call. Today's call is being recorded. At this time, I would like to turn the conference over to the Vice President of Marketing and Communications, Mr. Al Girardi. Please go ahead, sir.

Good morning, and thanks for joining us on our fourth quarter 2008 and year end conference call. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen, and Steve Ford, Chief Financial Officer. Statements made during this conference 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 Security and Exchange Commission 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, continuing revenue concentration in a limited number of clients; continuing a reliance on project-based work; worsening of marketing conditions; changes in external market factors; the ability and willingness of the Company's current clients and prospective clients to execute their business plans, which give rise to requirements for our services; difficulty in integrating and deriving synergies from potential acquisitions; potential undiscovered liabilities of companies that Innodata Isogen may acquire; 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 SEC.

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. Okay. Now, Jack Abuhoff.

Thanks, Al. Good morning, everyone, and thanks for joining us. During today's call, I'll provide some context for our fourth quarter and year end results. I'll talk about our strategy going forward, how we see Q1 shaping up, and then I'll share thoughts on the upcoming year. Steve Ford will then review the numbers in more detail. When Steve wraps up, we'll open up the call for your questions.

In the fourth quarter of 2008, we achieved revenue of approximately $20.4 million, up 11% from Q3. For the year, we achieved $75 million in revenue, capping our second consecutive year of record revenue. Net income in the fourth quarter was $0.23 per share. But if you put aside the noncash charge, which cost us $0.02 per share, as well as the valuation allowance reversal, which brought us $0.14 per share, both one-time events, you would have $0.11 per share earnings for the quarter. This represents a sizeable increase from third quarter's earnings of $0.05 per share. The $0.14 per share that we recorded as income is a noncash gain from a reversal of a valuation allowance on deferred tax assets.

We achieved two consecutive years of profitability, and our internal projections of profitability show that sufficient taxable income will be generated within the carry-forward period to be able to use up the full amount of net operating losses, which would offset future taxes. The $0.02 restructuring charge represents largely our one-time cost of severance packages for the headcount we reduced in Q4, which, as we stated in our December 11th news release, will save us approximately $600,000 in quarterly operating expenses, beginning in Q1. Steve will provide some more details on this in a few minutes.

We generated about $4.5 million in cash from operations last year and closed the year with cash and equivalents of approximately $14 million, with another $14 million in solid accounts receivable. We've added 40 new clients in 2008, including Pure Content, [Hashet Philipachia Media], World Book, Source Healthcare Analytics, and the United Nations Publishing Office, growing our roster 21%, from 140 to 170 active clients. In the fourth quarter alone, we added 11 new clients, up from eight new clients added in the third quarter. And throughout the year, including Q4, we saw steady improvements in the value of our pipeline. We did this while maintaining a client retention rate of about 95%.

The two questions I'm asked most often these days are, first, how do I think Innodata Isogen's prospects are in this period of economic uncertainty? And second, how are we managing the business differently in light of the economic uncertainty? First, let me address our prospects. In short, I believe this economy is presenting significant opportunities for our company. We have the opportunity to help our clients lower operating costs, helping them weather this storm and retool for the competitive demands that they're facing.

Based on a thorough review of our current sales plan, we believe that 2009 will be a strong year. In the first quarter of 2009, we anticipate revenue growth in the range of 5% to 10% over Q4. And we anticipate a very substantial improvement in operating profitability thanks to gross margin improvements resulting from our continued revenue shift to higher margin KPO engagements; our cost savings measures, the benefits of which kick in in Q1; increased operating efficiencies; and a better peso and rupee exchange rate. For the full year, we believe that we'll continue on the growth trajectory that we established this past year and show an improved bottom line, again thanks to the shift from relatively low margin work to relatively higher margin work, careful costs management, and a strengthening US dollar.

I'd like to provide some context around why we're able to express confidence and optimism at a time when so few companies can. First, we've made some good choices along the way. We've built competencies in high-end, hard-to-execute outsourcing. Unlike the back office space, which is rather crowded and undifferentiated, we have developed an ability to take on complex analytical and editorial processes and reinvent them as a series of subprocesses that can be performed in a global assembly line.

On top of that, we've put in place teams of IT architects and developers who can apply sophisticated technologies to content production operations, which enhance both our margins and our clients' immediate and future savings. On top of that, we've cultivated the ability to consult with our clients, both as part of our sales process and as a service in and of itself, to help clients figure out process and technology efficiencies to build into their operations. It's a good formula.

In addition to our good choices, we find ourselves in an environment where outsourcing is now seen, perhaps more than ever, as a strategic imperative for rapidly changing industries. And no industry is changing more rapidly, in my view, than the information and media industry. As these companies redefine their core competencies and their true value add, we're seeing greater business opportunity.

This has helped ease our continuing expansion into new, more complex and more profitable offerings, especially in the area of services, known broadly as knowledge process outsourcing, or KPO. Indeed, we've seen the pace and scope of our engagements in areas like editorial services, authoring, and content origination continue to increase, even as the broader economic downturn sets in. In addition, we're seeing that outsourcing as a strategy is increasingly driven by the [C level] with our client companies and that the C level is looking for the access to globally distributed talent and process efficiency that we can provide.

As I said just a few minutes ago, the second question I'm most often asked is how are you managing the business differently in the downturn? My answer is that we are doing several things differently. First, we're keeping a much closer eye on expenses. We're being cautious and careful about investments, and we're being vigilant in terms of cost management. We still see the risk of quarter-to-quarter variability, especially as we get further out, and we're cognizant of our continued high revenue concentration levels. As we enter 2009, we will remain focused on the fundamentals of earnings and free cash flow.

We also recognize that there's a lot that could occur that is outside of our control. Therefore, in order to stay flexible, nimble, and reactive, we've put in place more dynamic budgeting and forecasting processes so that we can identify and react quickly to changing conditions. For example, we're using scenario planning alongside our financial models.

We generated a number of different scenarios as part of our 2009 budget and developed contingency plans for each scenario so that we can react swiftly to various situations that the general economy could throw our way. In terms of forecasting, we've put in place systems that enable us to better predict pipeline to booking to revenue progression, and we've pegged the targets for each such stage and designed a system of early indicators for each such stage.

In terms of how we're managing differently, we're also very focused on opportunities that this market presents. First, we're seeing the opportunity to hire some top-notch people that, through no fault of their own, have become displaced or disenfranchised as a result of the economic downturn, people who might have had a -- or people that we might have had a hard time recruiting in another economic reality, people that can help us get this company to the next level. Second, we're seeing the opportunity to make accretive acquisitions at more attractive valuations. So these are the things that we'll be doing differently.

The things that we're going to continue to do because they're working are, first, to continue to transform our delivery model to accommodate the expanding KPO opportunity; second, to continue to expand business with our largest clients; and third, to continue to drive recurring revenue growth in our burgeoning client base.

Toward this end, we'll continue to adapt investing in enhanced capabilities that better enable us to deliver a wider array of complex services, including product engineering, research and analysis, and complex authoring and editorial services. I'm looking forward to taking your questions in our Q&A session. But now, I'll turn the call over to Steve, who will take a closer look at the numbers. Steve?

Thanks, Jack. Good morning, and thanks for joining us. Now, I'll walk you through the numbers. We'll look at changes in revenue, operating costs, and SG&A. I will comment on our growth, the favorable impact of foreign currencies, our cost reduction efforts, and the benefit to income taxes from the reversal of the deferred tax asset valuation allowance. In addition, I will highlight the cash generated from operations, discuss capital spending, and do a review of the balance sheet. I will complete with an overall summary of the financial results.

Okay, let's start with revenues. Fourth quarter revenue of $20.4 million was $2.1 million higher than the third quarter revenue of $18.3 million, or up by 11%, and was on par with the $20.5 million revenue for the same period last year. Looking at the full year, revenue grew to $75 million in 2008, compared to the $67.7 million we recorded last year. 2008 revenue of $75 million surpassed our company's historical highs.

We customarily separate our revenue into recurring and nonrecurring categories. Recurring revenue consists of services that we anticipate the client will require for an indefinite period. In contrast, services for a discrete project generate revenue that we regard as nonrecurring. In 2008, approximately 68% of our revenue was recurring, and 32% was nonrecurring, compared with 61% and 39% in 2007, respectively. In examining the year-over-year revenue increase of $7.3 million, it is interesting to note that recurring revenue increased by $9.8 million, while nonrecurring revenue declined by $2.5 million, clearly reflecting the shift in emphasis we have placed on generating a growing stream of recurring business.

Now, let's take a look at direct operating costs and SG&A. Direct operating costs in the fourth quarter of 2008 were approximately $13.1 million, or $1 million lower than the $14.1 million in the fourth quarter of 2007. As a result, the gross margin, which we define as revenue less direct operating costs, increased to 36% in the fourth quarter of 2008. This compares favorably to the 31% gross margin in Q4 of 2007 and to the 28% gross margin in Q3 of 2008.

The improvement in gross margin is attributable to the continued shift to higher margin KPO engagements, cost control measures instituted by the Company, the increase in operating efficiency, and the favorable impact of foreign exchange on operating costs in the second half of 2008. Similarly, gross margin for 2008 overall was 29%, up from 28% in 2007.

In regards to currency exposure, we have been benefiting from the recent strength of the US dollar versus the Indian rupee and the Philippine peso. As you know, we conduct the majority of our production activities in the Philippines and India and purchase those currencies to fund the operations. We primarily bill and collect in US dollars.

Therefore, the recent strength of the US dollar has given a boost to our gross margin. This benefit from US dollar strength has extended into 2009. We currently do not have any hedging contracts in place, but we are ready to take on hedging activities as part of an overall currency management strategy we are continuing to formulate, or in the event forecast indicates a weakening in the dollar.

Now, let's look at SG&A cost, which declined in the fourth quarter of 2008 to $4.4 million, or 21% of revenue, from $4.7 million, or 23% of revenue, in the fourth quarter of last year. For the full year 2008, SG&A was $16.1 million, or 22% of revenue, compared to $15.3 million, or 23% of revenue, in 2007. As a result of our cost reduction efforts, we are anticipating that both our fixed operating costs and our SG&A will show the benefits of scale as revenue increases.

In December 2008, as part of the overall cost reduction plan to reduce operating costs, we initiated a restructuring plan to reduce our global workforce by approximately 260 employees, the majority of whom were based in Asia. In connection with the restructuring, we recorded a one-time charge of approximately $475,000, or $0.02 per diluted share, which represents severance and other personnel-related expenses. We expect that this cost reduction effort will yield approximately $600,000 in quarterly pre-tax operating cost savings beginning in the first quarter of 2009.

On a pre-tax basis, we earned $5.5 million in 2008, compared to pre-tax earnings of $4.5 million in 2007, representing an increase of $1 million, or 23%. The increase is attributable to higher gross margins and lower SG&A costs as a percentage of revenues. Similarly, looking at sequential quarters, our pre-tax income increased by 88%, from $1.6 million in the third quarter to $3 million in the fourth quarter of 2008, in spite of the fact that we initiated a restructuring program, for which we recorded a one-time charge of $475,000. The increase in pre-tax income is due to our cost control efforts, the increase in higher margin KPO work, and the recent favorable currency environment.

After tax, the Company reported net income of $5.6 million, or $0.23 per diluted share, for the fourth quarter of 2008, up from $2.3 million, or $0.09 per diluted share, in the fourth quarter of 2007. On an annual basis, we earned $7.6 million, or $0.30 per diluted share, in 2008, as compared to $4.6 million, or $0.18 per diluted share, in 2007.

I will now go through the tax adjustment we made in the fourth quarter. We had established a valuation allowance on deferred tax assets in 2005 and 2006 as a result of net operating losses in those years because it was thought more likely than not that all or some portion of the deferred tax asset would not be realized. However, we established a pattern of profitability in both 2007 and 2008. In the fourth quarter of 2008, we took into consideration several factors, including our recent cumulative earnings and the expectation of future taxable income.

Based primarily on these factors and our current expectation that it is now more likely than not that the Company will have sufficient taxable income in the future to offset the net operating losses of the prior years, we reversed the previously recorded valuation allowance, resulting in a noncash tax benefit of approximately $3.3 million, or $0.14 per diluted share.

Before the impact of the reversal of the valuation allowance and the one-time restructuring charge, the annual earnings in 2008 would have been $4.7 million, or $0.19 per diluted share, up from net income of $4.6 million, or $0.18 per diluted share, in 2007. Similarly, excluding the reversal of the valuation allowance and the one-time restructuring charge, earnings for the fourth quarter of 2008 would have been $0.11 per diluted share, up from $0.09 per diluted share in the fourth quarter of 2007.

Now, we will take a look at the balance sheet and cash flow. Our cash flow from operations was $4.5 million in 2008, driven primarily by the increase in net income and depreciation, partially offset by the reversal of the deferred tax valuation allowance and cash used for working capital purposes. We ended the year with approximately $14 million in cash. Our free cash flow in 2008 was $2 million, which was the result of subtracting $2.5 million in capital spending from the $4.5 million in cash flow from operations.

We anticipate that capital spending for expansion and ongoing technology, equipment, and infrastructure upgrades will be in the range of $4 million to $5 million in 2009. Working capital improved significantly by $6.5 million from $16.3 million in 2007 to $22.8 million in 2008. At December 31, 2008, we maintained our $7 million line of credit, and we have no outstanding obligations under this credit line. We believe that our existing cash balances, funds generated from operating activities, and funds available under our current credit facility will provide sufficient sources of liquidity to satisfy our financial requirements for the next 12 months.

To recap, in 2008, our revenue increased by 11%. Our recurring revenue increased to 68% in 2008, as compared to 61% in 2007. As we have indicated in the past, we are continuing to achieve significant operating leverage, which is a key feature of our business model, with an additional $1 million in pre-tax earnings from the 11% revenue increase. The margins have improved to 36% in the fourth quarter, driven primarily by the continued shift to higher margin KPO engagements, our cost control measures, operating efficiency, and the favorable foreign currency environment.

Projected increase in revenue in 2009 could mean more cash flow to the Company, which could be reinvested in the business or used for M&A activities. With regard to M&A, we are continually examining some very good opportunities. Current turmoil in the financial markets poses a challenge, but also represents an excellent opportunity for us. We are in a financially strong position that enables us to benefit by combining both organic growth and acquired growth. Okay, that wraps up my discussion for now. Again, thank you, everyone. Operator, we're ready to take questions.

Thank you, Mr. Ford.

(Operator Instructions)

And our first question comes from Bill Sutherland at Boenning Scattergood.

Good morning, Jack and Steve. Sorry.

Good morning, Bill.

What is -- what was client concentration in the quarter, Q4?

I think we're hovering about two clients, is about half the business. The two clients are both $5 billion plus global enterprises. We've got a diversity of projects of each.

Right. And the recurring revenue percentage in the fourth quarter, was it above the full year of 68%?

Fourth quarter recurring revenue was actually 63%, so it was slightly down. And, Bill, that tends to vary on a quarterly basis, up and down.

Okay. Jack, could you talk a little bit more about the investments planned for the year? I think, Steve, you summarized it is as requiring, as far as CapEx, $4 million to $5 million.

Yes, that's correct.

There is a combination of things there that we're looking at, Bill. We're going to be doing some expansion of the production capabilities. We're expanding to accommodate additional high end KPO editorial headcount. That's a lot of it. There's some CapEx catch up from last year that we'll probably be looking at also. And beyond that, that accounts for the CapEx side of the business.

Beyond that, we're looking at accommodating the opportunities that we see that are very significant right now in the market. So we're going to be investing in people. We're going to be investing in some new capabilities that we are very certain are aligned with the direction the market's taking and the things that they're looking for us to do.

So that's essentially going to be IT kind of investments, right, Jack?

There -- it's -- will they be CapEx investments is a combination of IT and physical infrastructure investment. People investments are, of course, not capitalized. But in our business, they're critical and they absolutely drive our growth.

And are you primarily focused in the Philippines as far as the growth in capabilities in '09?

No, we're not. In fact, one of our important value propositions to the marketplace, and it's resonating very well now, is it's variously termed multi-shore or distributed workflows. We're not wedded to any one geography.

We believe that there are a lot of -- there's a lot of work that's been done in a very inefficient way, which we can take and disaggregate and distribute along a web-driven assembly line, basically, create much more efficiency, build for the type of continuous publishing that our clients are looking for now. So we're active in the Philippines. We're active in India, of course. We have things going on in China now, but we also have things going on in Israel, and we'll probably be expanding Europe.

And we'll go next to Joe First of First Associates.

Good morning, gentlemen. Congratulations on a very good quarter. I had a couple of quick questions. First of all, is the increase in SG&A in the fourth quarter up from the third quarter, is that because of that one-time charge that you were talking about?

Hi, Joe. This is Steve Ford. It's partially due to that. And also, if you look at our typical pattern of spending, two things occur in the fourth quarter of every year. One is we have our annual audit, so we have the audit fees associated with that, and we do some marketing initiatives that we take place generally every fourth quarter. So those two items combined were the primary reason, along with part of the restructure that went into SG&A. The majority of the restructure went into cost of goods or direct operating expense.

Thank you. And a question about the Kindle that Amazon has, and other book publishing. Do you see an opportunity for getting a lot of business from that kind of activity?

We do, actually, and there's a lot going on there. We see that the Kindle has created a tremendous amount of traction in its second generation. There are some other devices that are very exciting. If you hasn't seen the Plastic Logic's Reader, I encourage you to look at that.

So I -- the developments that have taken place at the platform level, the device level, is really feeding a lot of excitement among our clients. They're expecting that the E-books industry can be a $3 billion to $5 billion industry within the next few years. And we're actively involved with all of the major publishers of E-books right now.

Thank you. And are we seen a lot of -- about the computerization of all the medical records around the country. Is that anything that you could participate in, in that business?

It could be. It could be. And we're -- it's something that we're looking at and monitoring very closely. We want to get in it, if we do get in it, at the right time, doing the right things for people. We've got a medical and health business unit that does medical and health work. We just hired some new leadership for that business unit. They're pretty excited about some of the things that are taking place in the world. We, as you know, have a lot of medical and health subject matter experts that are part of our staff. So we're monitoring that very closely, and we will be looking for opportunities there.

And one more quick question. Your growth over the next year and in years beyond, what portion of that do you think will come from the getting new business from existing KPO customers, and what percent? Just some rough idea of new customers and then from other project business.

Well, I think there's a life cycle. And when you model it out, it becomes pretty compelling. We bring in new customers. Typically, we don't sign up a new customer for a very large engagement immediately.

But we've got two things going for us. We've got a very high client retention rate. And then, when you map out the growth that we get in clients and the business that we end up bringing in as we mature and develop the relationship and the trust with the new client, it's very substantial. So there's a real building and swelling effect that we see taking place, and we're very happy with the new logos that we're bringing in right now.

And we'll go next to Tim Clarkson with Van Clemens.

Hey, guys. Great quarter. Just wanted to know, what would you say is the margin of safety, or what differentiates Innodata from the competition, both for -- in the KPO area and also in digitizing E-book area?

Tim, there are a lot of things. We could talk about various tools we've got in place, technologies we've got in place. We could talk about our distributed workflow capabilities, and all of these things are very important. But I think ultimately what it boils down to is we've built our company around processes and with people that are very focused on client goals.

So internally, we're very nimble and we're very flexible. We can configure ourselves to help people do lots of different things. We can go very, very high end in what we output and deliver. But it's our engineered focus on client goals that I think is helping us really develop the trust of some very, very important clients and enabling us to grow the Company.

Okay. In this E-book area, how big do you think the industry is right now, and how big do you think it can get in a two to three to four-year period?

I rely on analysts for that. And Outsell, who is the single most respected analyst firm covering information media, says that it sees the E-book industry growing despite the economic crisis, and it's putting very big numbers on that, as I said, $3 billion to $5 billion. That's a lot of business. That's a lot of business.

Right. Now if me and a couple of buddies wanted to try to compete with Innodata, what would be the problems that we'd face in terms of becoming competitors to you in the E-book area?

Well, we've got warehouses in the Philippines that we own that have millions and millions of books, probably a copy of every book that's being sold today. That's -- you'd probably need to get that. Beyond that, you'd need to get the technologies that we've developed to very efficiently create E-books. You'd have to have the process capability and the process maturity that we've developed. And then, you'd need the people. So it's process, technology, people, and a tremendous installed base or warehousing of lots of content.

Okay. Can you describe real briefly -- this is my last question -- what -- how many -- when you're digitizing a book, how many of the processes are done by a computer, and how much involve actual human intervention?

It's really a combination. You can't do it just by computer, and you can't do it just by people. The systems and the technologies we've developed are very closely interwoven. We've created great XML-driven processes that enable us to do things in a very generic way and then use the technology to meet lots of different requirements. And we're looking not just at today's requirements, but we're looking down the road at how we believe publishers are going to be publishing books and E-books in the future.

What's exciting about the E-book platform, just beyond its portability, is that publishers can start to become more continuous. They can be updating chapters and updating content or selling by the drink, selling by the chapter. And all of this is technology driven, and it's technologies that we're very good at and that we're -- we're trying to stay ahead of the people that we work for, and we're trying to be in a position to consult with them and show them what's possible and enable them, again, to achieve their goals. So it's very exciting.

(Operator Instructions)

We'll go next to Ephraim Fields at Clarus.

Hi. I was wondering if you could just update me on your cash -- what your cash taxes should be for the foreseeable future. Or, put it another way, how -- given the changes to your NOL, how much of your pretax income can you shield from cash taxes?

Yes, Ephraim. This is Steve Ford. Good question. We have ended the year with approximately $7 million in NOL. So to take the $7 million at your standard, if you will, federal and state tax rates and, let's say, roughly use 40%, that would be the amount that you could look at as cash taxes we still would not have to pay as we earn that income in 2009.

Got it. And what should your book taxes be next year? What tax rate would you be using?

As you look at us in 2009, with the reversal of the valuation allowance, we will enter into a period of becoming a more regular taxpayer for book purposes, which is of course separate from your original -- your first question on cash. So we'll look at becoming a more regular taxpayer.

Now, our rates are blended. So we have roughly 50% of our income is US based, which will be according to my first answer, on the books. And then, we have various rates in India and in the Philippines, many of which are comparable or close to the US rates. So a normalized US rate in both federal and state would be a reasonable approximation to make in looking at us in 2009.

Got it. Okay. Thank you.

You're welcome.

And we'll take a follow-up question from Bill Sutherland at Boenning & Scattergood.

Bill Sutherland. Thank you. Steve, the gross margin in Q4, the nearly 36%, that was -- included in that was part of the restructuring charge, correct?

That's correct.

So what was the unburdened gross margin in the quarter?

Roughly, when you look at the restructure, the $475,000?

Yes.

You can take about 75% to 80% of that as being associated with direct operating costs.

Okay. Then that adjusted direct cost or gross margin, is that something that is sustainable going forward, as far as our models?

Yes. I think that when we think about it, we're looking at improvements on that, really. There's a lot that's still in there, in terms of cost set that we see coming out. As we said, we're -- the savings kicks in in Q1. We're going to continue to try to increase the KPO portion of the business. That will have a positive margin effect. So we're looking at that and looking for improvements.

And so, Jack, the savings will be reflected in a combination of direct costs and SG&A?

That's correct, heavily on the direct cost side.

Very heavily on the direct costs, Bill. And so really, to help you a little bit, as you look at our Q4 results, and you can adjust for some of the things you're mentioning, on a go-forward basis, as we're indicating, as Jack has indicated, we're looking to use that as a place where we're going to move from and continue to work to improve.

Okay, okay. And then, last question, there is a little bit of a remaining charge that you'll reflect in Q1?

Yes, Bill. It's minimal.

Okay.

It's very small. But it's just -- we just had a few people that still worked into the first quarter for a few months, a few individuals for a few months.

Okay. Great, guys. Thanks so much.

Thank you.

And we'll take a question from Gary Siperstein at Eliot Rose Asset Management.

Hi, gentlemen. Good morning, and congratulations on a great quarter.

Hi, Gary.

I want to start out, and I apologize if I missed this, on the book digitizing, you mentioned the Sony Reader, the Kindle, and I think you said something -- Plastic Logic's Reader. Is that a third company, or is that part of Sony?

That's a different company.

Okay. And we're working with all three?

Well, Plastic Logic's is a device. It's not a company that's looking to be a book seller or a content provider the way that Sony and Amazon are.

Okay.

But beyond Sony and Amazon, there are several publishers that are, in a very significant way, becoming E-book publishers as well, and we're working with those also.

Okay. And can you tell us what the revenue number was for the book digitization, with all players in the quarter?

We don't break that out, and I don't have that on hand. I think the way to think about it is that it's a nice part of our business. It's something that's prospectively very exciting. Most of the growth that you're seeing now, though, and have seen in the past couple of quarters is really on the KPO, editorial side of the business, which is where -- is the part that I'm most excited about. To me, the E-books is very interesting. It's icing on the cake.

Okay. And not to push you on it, but so, therefore, it's not material yet? You'd consider it less than 5% of the quarterly revenues?

I don't want to say that that's the case, but it's not -- it's -- again, I can come back to you with that number. I don't think it's really the story here.

Got you. Okay. Let me move on. You mentioned M&A. Can you give us some examples of what you'd look for in M&A? And let me preface it with just generally saying, we're really hitting on all cylinders now. So as a long-term shareholder, my fear is that we'd try to have too many balls in the air.

So can you tell me what your -- I know you want to do something accretive and make one and one equal three. But I guess I'm concerned with if it were to entail another country or another 1,000 workers or something completely foreign to what we're doing now, obviously, there's risk. And because you have such a lean management organization, Jack, my concern is juggling too many balls. So can you talk to that a little bit?

Sure, Gary. And I share your concern. I think it's very important that we stay tightly focused, and I think the results that we're able to report today and the results that we're anticipating are a result of that tight focus. When we saw -- when it was our perception that valuations were a little too rich in some of the things that we were looking at, we were happy to sit on our cash reserves. We were happy to -- we didn't feel like we needed to get a deal done, and we still don't.

We're still going to be very selective. We're not just opening things up to deal flow. We're -- there's certain things that we think are very strategic add ons to our business that would enable us to expand the current set of services, but then also, to leverage our technology expertise and our demand expertise in some new and exciting areas.

Again, we're -- we might be sitting here a year from today and tell you we haven't gotten a deal done because we don't feel that we have to. We feel that we can hit our year and the numbers that we're looking at without getting a deal done. But if in this market, we can do the right deal, that would be throwing a couple more logs on a nicely burning fire.

What would be, just to push you a little more, what would be the right deal? You said if we can get into some new and exciting areas. What -- you don't have to tell me the one that you prefer, but can you give me an example of two or three new and exciting areas?

Yes. I think that it's something that I'm very excited about. I think in this forum, it would be a mistake to go into too much detail about that. I think you'd see us going in a couple of directions that are not the most obvious ones, which several of our competitors have taken and have gotten several of them in trouble. So I'd really rather not telegraph our specific plan at this -- in this forum at this point in time.

Okay. And then, I'm not asking you to make a -- to give guidance going forward, but I just want to say something, and just tell me if I'm on the right path. When you do an $0.11 fourth quarter and you say the first quarter's going to be better, and I know there is variability quarter to quarter, but everything else being equal, if I were to think we have a shot at $0.40 this year, or $0.44, and implicit in that would probably be, let's say, $15 million in cash flow and $5 million -- $4 million to $5 million in CapEx, and we get about $15 million in cash now, if some of the receivables come in, maybe $17 million.

So if I were to hypothetically say have we got a shot at $0.40 to $0.44 and cash 12 months from now could be $25 million, which is $1 a share, so at $3.50 a share now minus $1 in cash, leaves $2.50 enterprise value. And the cash, with interest rates under 1% for treasuries, is not any meaningful part of EPS, so the full $0.40 would go to enterprise value. So with a $3.50 stock price today minus $1 in cash a year from now, $2.50, $0.40, so is my logic right? We're about six times this year's earnings, growing revenue at a 10% plus clip, and that would result in 100% EPS growth. So I'm not saying for you to comment that you'll do that, but is my logic on track there?

I think your logic's on track.

Okay. Thanks, guys. Congratulations.

Thank you, Gary.

(Operator Instructions)

And we'll go back to Ephraim Fields at Clarus.

I'm sorry. Could you just clarify the comment you made about the cost saving initiative that you initiated at the end of December that was $600,000 of pre-tax saving per quarter, or for the full year?

Per quarter.

Okay, okay. So it's $2.4 million. At the risk of asking a dumb question, it's $2.4 million that you should get next year that you didn't have last year, right?

That's right.

Okay. Thank you.

And we'll take a follow up from Joe First of First Associates.

As Gary just pointed out, you have an increasingly better story to tell. Are you continuing to do some work in the financial PR area and visiting potential buyers of your stock and trying to get some coverage?

We are. Our IR Department has filled up my schedule pretty good for, I think it's the 19th of this month, and we'll see how those meetings go. And if we're getting the traction that we expect we will, then we'll have follow ups on that.

Thank you, and again, congratulations on the good progress you've been making.

Thank you.

(Operator Instructions)

And, Mr. Abuhoff, with no other questions remaining in the queue, I'll go ahead and turn the conference back over to you for any additional or closing remarks.

Okay. Well, thank you. And thank you, everybody, for joining us. Thanks for your questions.

Let me do a little bit of recap. In fourth quarter, we generated $20.4 million in revenue. We closed the books on a solid year, annual revenues of $75 million. Fourth quarter net income was up from $2.2 million in '07 to $5.6 million in '08. But remember, that's $2.7 million if you back out the one-time adjustments. For the year, annual net income was also up, from $4.5 million in 2007 to $7.5 million in 2008, or $5.6 million, if again you back out the one-time adjustments.

In Q1, we're looking at revenue growth in the range of 5% to 10% over Q4, so that's sequential, with a substantial increase in profits. For the 2009 calendar year, we're expecting a third consecutive year of year-over-year growth, with improved earnings. Quarter-to-quarter choppiness and revenue concentration are realities that we continue to live with, although our strategy of growing recurring revenue is working and working nicely.

That we're now up to 68% recurring revenue gives us much greater visibility and growth capability, and it also makes it easier to endure whatever choppiness we might experience along the way. While we are optimistic and confident, we are very cognizant of what's going on in the world around us. As a result, we're managing our gross margin and our overhead much more carefully. We will be emphasizing income and free cash flow in the decision making.

At the same time, this economy might just provide the perfect environment for us to get this company to the next level. Our clients' appetites for lowered operating and product development costs are substantial. Our differentiating ability to help not just with outsource processes, but also with related technology development and implementation and consulting is, I believe, the right recipe for today's market requirements. And there is talent for hire that we can use to bootstrap ourselves and fill in some gaps. So thanks again. I'm very much looking forward to being with you next time.

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