Innodata Inc (INOD) 2010 Q1 法說會逐字稿

Good day, everyone. And welcome to the Innodata Isogen First Quarter 2010 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Corey Luskin, Vice President of Corporate Development. Please go ahead, sir.

Thanks, Jim. Good morning, everyone. And thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen, and O'Neil Nalavadi, our CFO. Jack is actually joining the call from our offices in India. We'll hear from Jack and O'Neil and then, as usual, take your questions.

Before we begin, let me remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties as described in our Earnings Release and other filings with the SEC. With that, I would now like to turn the call over to Jack Abuhoff. Please go ahead, Jack.

Good morning, everyone. And thanks for joining us today. I'd first like to provide some commentary on our results, and then give you some perspective on where things stand as we work to get back into growth mode in 2010. Now, before I do that I need to quickly cover an accounting reclassification we've implemented. Otherwise, we won't be able to make appropriate comparisons to prior periods.

The reclassification mentioned in this morning's press release simply has to do with how we treat certain costs that we incur but pass through back to our customers. These costs for things like content subscriptions which we utilize for certain client projects and other fees have typically run in the range of $500,000 to $1 million per quarter. In the past, we reported these pass-through amounts in both revenue and cost of goods sold. So, our reporting was on a gross basis.

Starting in the first quarter and going forward, these expenses will be netted out of both revenue and costs. All else equal, this makes for a lower revenue number and no impact on gross profit. We don't see this as a major change, but are happy to answer any questions you may have about it later.

We last spoke to you only seven weeks ago on March 11 when we reported fourth quarter results. On that call, we told you that first quarter revenue would be between $16 million and $16.4 million on a gross basis. Factoring in the pass-through costs, we came out at the high end of this range. First quarter reported revenue was $15.5 million after netting out about $900,000 of pass-through costs. Fourth quarter revenue on a net basis would have been $16.2 million for a sequential decline of about $700,000. Recurring revenue constituted 71% of total in the first quarter, up slightly from the fourth quarter.

Our cost of sales in the first quarter was $12.3 million, down from $13.5 million in Q4, again, adjusting for the pass-through costs. This improvement occurred because we were able to trim some of our variable costs relating to certain projects that came to an end. Cost of sales was a little higher because we carried about $400,000 in extra direct labor capacity relating to the discontinued project we discussed on our last call. We were also carrying another $400,000 or so per quarter in cost of sales to expand our consulting, IT outsourcing, and certain KPO areas.

Gross profit was $3.2 million, an improvement over the adjusted fourth quarter amount of $2.7 million. And our gross margin was 21%, up from 17% in the fourth quarter. Absent the reclassification, gross margin percentage would have been just under 17%.

SG&A expenses were $4.1 million. We expect the run rate of SG&A to be at or below this level except for fourth quarter where we'll typically have some year-end expenses. This $4.1 million compares to $5.9 million in the fourth quarter, which was so high because it included $1.4 million in reserve for doubtful accounts. As a percentage of sales, SG&A was 27%, down from 36% in the fourth quarter.

We showed a pre-tax loss of just over $900,000 compared to our pre-tax loss of $3.2 million in the fourth quarter. Despite the pre-tax loss in the current quarter, there was a tax expense of around $473,000 in the quarter. This relates to an accrual we needed to make for one of our subsidiaries in India, which O'Neil will cover in more detail. Our net loss was $1.4 million compared to a net loss of just under $800,000 in the fourth quarter of 2009.

In our call seven weeks ago, I went through in detail the events which combined to make Q4 and Q1 now so disappointing. As you may recall, the first was the unexpected cancellation of a $6 million contract, which we had planned would contribute significantly to revenue in Q1 and Q2. The second was a $1.2 million reserve we took with respect to a client that had run into financial difficulty and the accompanying decision not to recognize $400,000 of revenue from this client in Q4.

As we said in the call, we'd be hitting the pipeline hard to fill as much of the Q2 void as possible as soon as possible. And we said that we have the time and, most importantly, market opportunity to work hard to address the second half of the year.

As you might imagine, the $6 million project cancellation, which had several million more of pipeline attached to it, was a tough thing for my managers to put behind them. Not that we want to put it completely behind us. There were some important lessons learned there, which we also discussed in our last call. But I now feel that the collective energy is again focused on where it should be and needs to be, the future. We have solid market opportunity and an enhanced team positioned to grasp this opportunity. With our expanding pipeline of opportunities, we're working on some potentially high-value deals.

One point about the decline in revenues from our top two clients that we mentioned in our press release, as we've discussed on past calls we saw significantly reduced volume from our top two clients during the second half of 2009, as one of these clients went through with budgeting and planning process for the large projects which we were providing support. The $7.7 million year-over-year decline in revenue from our top two clients reflects this. We continue to discuss prospective potential requirements with this client.

But at this point we don't know when or if they'll reaccelerate or if year-over-year declines from this client will continue in the next several quarters. If we do see a requirements expansion this year, it may still be unlikely that we will get back to the levels we saw in early 2009.

Our core client base, global publishers and information services companies that collectively represent many tens of billions of dollars in operational expenditure each year, have been seeking to outsource not only more work but a fundamentally wider range of work. This is a niche market, but a good-sized one that presents ample growth opportunity for us at this point. I'm here today in India taking part in client meetings with a multi-billion publishing company. It sees our capabilities as leading the market.

They told us earlier today how much they value our ability to bring together offshore support operations, globally-distributed editorial operations, and content-focused IT and consulting leadership. They expressed how much they want to harness these capabilities to help them shape and implement their transformation roadmap.

The trends that they're transforming to, essentially moving from supplying their customers with books and static online databases to integrated mobile workflow tools, is a trend that doesn't just apply to professional publishing. It applies across content verticals including education, business media, general consumer, and other areas. We have varying degrees of activity in each of these verticals. But in each one we have at least a toehold. And in all of them there are real growth opportunities for Innodata Isogen, whether organically or through acquisition.

In comparing where we are today to a few years ago, say, for example, at the end of 2006, the change is considerable. We're operating at a fundamentally greater scale and scope. We possess the ability to deliver knowledge-intensive services, including high-level product development and sophisticated editorial functions. We've established a commissary track record executing complex engagements, and have developed a leverageable franchise for future growth. We are well-aligned with key market drivers such as e-books and, more broadly, the shift toward digital and mobile consumption. And our sales reach and consistency is far greater than it was three years ago.

Innodata Isogen is actually one of the larger pure play publishing and information services outsources. But we are not yet big enough that we immunize ourselves from client concentration issues. And we have to ride this out with an eye to the future as we put in place capabilities that will enable us to grow with our market opportunity. Between the project discontinuance and some slowness within our largest clients, we're off to a slow start in 2010 on the revenue side. But I think we're on track in executing the vision for long-term growth achieved by progressively increasing our usefulness to an expanding market.

Seven weeks into our re-planning work, I can tell you that we have made progress on both the revenue and the expense sides. But it's still early in the process. And it will take another quarter or so before our efforts to fill the hole really start to show. Since early March, we have signed approximately 30 customer contracts across our various business areas. Much of this has come from pre-existing customers who are bringing us new projects, as well as renewing old ones.

Other portions are from entirely new customers coming to us for e-books, e-learning services, and other publishing services. These have generally been what I might call bread-and-butter business. While they typically haven't risen to the level where we've issued news releases about them, they are indicative of a customer base that is expanding in scope and finding new requirements for outsourcing. I do think that this kind of business will be an important part of a more stable growth pattern for Innodata Isogen in the future.

More generally, we expect distributed revenue growth to come from a few sources. One of these is e-books. While still a relatively small part of our revenues, e-books have good potential. We are doing work for most of the major devices and publishers. And the iPad promises to bring new customers into the market this year. The very definition of e-book is expanding to include multimedia and app-like functionality, which should result in increased requirements from our customers. Beyond that, more magazines and newspapers, many of whom are customers, are investing to get into the game.

And as I described again seven weeks ago, we are seeing solid opportunity in KPO, education and e-learning, technical communications, and our traditional publishing services businesses. For example, we are seeing opportunities to implement the full-scale lift-out of editorial operations from large publishers, which would have been unheard of a few years ago. And we are engaged in discussions with prospective clients for such opportunities.

Furthermore, I do expect that our investments in consulting and IT-related services will pay off in 2010. We are seeing opportunities to help information companies adopt new technologies and outsource development. We are also seeing more opportunities to employ our consulting resources, helping clients improve their existing operations and technologies and implement new processes and technologies.

In terms of the second quarter, again, as we said seven weeks ago in our Q4 call we will still feel the impacts of the setbacks I referred to before. We have a lot in late-stage pipeline. So, it's difficult to put a number on the quarter at this point. Looking out more broadly over the year, we seem to have the momentum regained to deliver an improved second half. Looking broader still, we believe that by riding out our recent difficulties rather than shedding investments in the business, we'll be positioning the business for growth that will demonstrate an increasingly strategic scope, which in turn will help drive margins and smooth out the bumps.

Now, before I hand it over to O'Neil, I would like to repeat several milestones that I articulated in our two most recent calls and that I would invite investors to measure us by in 2010 and 2011. First, acceleration in new bookings from an expanded customer base that reduces our dependency on top two customers. This reflects our market opportunity as the payback from our investment in sales and marketing over the last couple of years.

Second, significant new wins as a direct result of our 2009 and 2010 continuing investments in our IT Services Group and our Consulting Services Group. And, third, significant new wins in editorial KPO, technical communications, and e-book related services that, again, is a direct result of our investment in these areas. Thanks. And, with that, I'm going to turn the call over to O'Neil, who will provide some additional insight into our numbers. O'Neil?

Thanks, Jack. Good morning, everyone. Again, thank you for joining us today to review our first quarter financial results. Jack just shared with you an overview of our performance and our perspectives of the business. Before I walk you through the key line items in our financial statements, let me share some prepared comments.

First, starting this quarter we made some reclassifications in revenue and direct operating costs. Certain pass-through expenses delivered to clients which were previously included in revenue and direct operating costs are now being netted from both revenue and direct operating costs. This has the effect of reducing revenue and direct operating costs in the current quarter by $880,000. Prior years' information was also reclassified to conform to the current quarters. And we will continue with this practice for the subsequent quarters this year.

Second, our operating performance in the current quarter has been impacted by the events that we shared with you earlier. On a year-over-year basis, our top two customers reduced spend with us by approximately $7.7 million. Our continuing investments and strategic initiatives involving content focus, consulting, and IT services are still in the gestational phase. These investments show up on our revenue statement in the form of expenses. The combined impact of these two issues, lower spend by our top two customers plus the investment expenses, is approximately $5 million on our margins for the quarter.

Third, the sales pipeline and higher-margin service offerings like KPO and [IPU] is encouraging. However, we cannot predict with certainty when some of these prospects will close. So, until we gain traction our near-term revenues may remain below our target.

Fourth, our model works pretty well in terms of aligning our direct operating costs to changes in revenue. For example, we reduced our production headcount by 1,600 people from 7,100 at the beginning of the quarter to 5,500 at the end. However, our return to profitability is mainly dependent on our ability to execute revenue growth.

Finally, (inaudible) our financial statements have been focused on the sequential changes because this will give all of you a more meaningful analysis on the run rate of our business. Since my remarks are focused on these sequential changes, I will be happy to answer any questions on year-over-year results during the Q&A session.

Now, I will review the various line items in the financial statements. Revenue in Q1 was $15.5 million, a sequential decline of about $700,000 or 4.4% from $16.2 million. As previously stated, we have reclassified certain reimbursable expenses from customers to be excluded from revenues starting this quarter. If such reimbursable expenses had been included in revenue, the gross revenue would have been $16.3 million, which is at the top end of our estimates provided to you at our last earnings call.

The expected sequential decrease in revenue of $700,000 was primarily because of fluctuating needs of our clients. Our top two customers reduced spend sequentially by approximately $200,000 to $4.5 million in the current quarter. And this decrease was offset by increases in revenue from other customers. Our top two customers contributed 29% of revenues in the last two quarters on a sequential basis. A year ago in Q1 of 2009, that proportion was 58%.

Now, looking at the nature of our revenues, recurring revenues which are services we anticipate we will provide on an ongoing basis to our customers increased as a percentage of total revenues to 71% from approximately 68% in Q4 '09. The corresponding percentage a year ago in Q1 2009 was 59%.

Now, let's turn our attention to gross margins. We made good progress in improving our gross margins sequentially. Our gross margin increased 400 basis points from 17% in Q4 '09 to 21% in the current quarter. The increase in gross margin was driven by a few factors. Higher margin revenue mix contributed 100 basis points. The reduction in number of employees, better utilization, and other efficiencies contributed 240 basis points.

Lowered seasonal expenses for production employees compared to Q4 contributed 140 basis points. These gains totaled 480 basis points, which were partially offset by product setback, which is outside our control, and the investment in software and IT personnel, which reduced margins by 80 basis points.

Now, [drilling] down to selling and administration overage. SG&A expenses were $4.1 million in Q1 compared to $5.9 in Q4 '09. If you recall, we incurred non-recurring expenses of $1.6 billion last quarter, which created a result of [after] debts of $1.4 million and took a $200,000 write-off on certain production assets due to consolidation. Excluding these non-recurring expenses, the sequential decline in Q1 was approximately $200,000, which was primarily due to the timing of incurring certain expenses such as incentives, marketing expenses, license fees, and audit expenses.

Now, turning our attention to pre-tax earnings, for reasons that we explained in the last call, loss revenues, changes in revenue mix, and a one-time increase in SG&A had resulted in pre-tax losses of $3.2 million in Q4 '09. In the current quarter, we continue to feel the impact of loss revenues, though we mitigated it by lining our cost structure, which will reduce our pre-tax losses by 40% to $900,000.

Let me now review our tax provisions. We estimate our effective tax rate to be in the range of 28% to 30%. Now in the current quarter, although we had a loss, we had an accrual for tax expense of $500,000. The reason for this aberration is that some of our international subsidiaries made profits, and others sustained losses. So, we had to accrue for tax expense in each subsidiary in accordance with the tax laws of each respective jurisdiction.

Of the total accruals of $500,000 for tax expenses, approximately $200,000 was for taxes and profits made in profit-making entities, while the balance of $300,000 was because of our assessment of a possible claim in India for the tax year ended March 31, 2010.

To give you a background, our Indian subsidiary is entirely dependent on the parent Company for revenues. In the case of [captu] production units of global corporations, such as ours, Indian income tax officers have wide-ranging discretionary powers to levy taxes based on their assessment of profitability rather than on actual profits of the subsidiaries. As such, we have received additional tax claims for years 2003, 2005, and 2006, which we believe are without merit and which we are contesting vigorously.

However, in accordance with US GAAP, until we know the outcome of those cases we have to accrue for tax expenses based on our assessment of possible claims for the current period. We have therefore approved an expense of $300,000 in Q1.

In terms of EPS, we lost $0.06 per diluted share during the first quarter comparing to a loss of $0.03 per diluted share in the fourth quarter of '09. Now, turning our attention to cash flows and the balance sheet, though we incurred a loss in the quarter we generated cash from operations of $400,000. This primarily came from addbacks of depreciation and amortized expenses of $1 million and a reduction in accounts receivable balances by $1.3 million.

This is a significant improvement compared to cash used in operations of $800,000 in Q4 '09. We incurred capital expenditures of $900,000 in Q1, primarily on software and hardware in our global production and delivery centers.

After taking into account free cash flows and financing activities, we ended the quarter with $25.8 million in cash compared to $26.5 million in the beginning, a decline of $650,000. We ended the quarter with accounts receivable of $10.4 million compared to $11.7 million at the end of last quarter. Our days sales outstanding, or DSO, increased to 65 days in Q1 from 60 days in Q4 '09.

Working capital at the end of the quarter was $31.9 million compared to $32.6 million at commencement. We maintained a $7 million line of credit under which we have no outstanding obligations. We believe that our existing cash balances together with operating cash flows and funds available under our credit lines will provide sufficient sources of liquidity to satisfy our financial requirements for the next 12 months.

Now, I wanted to share a couple of line items which are not line items in the financial statements. We have approximately $4.2 million of carried-forward tax (inaudible) in the US, which will give us a tax shield in future years. Second, at the end of Q1 we have foreign currency forward contracts worth approximately $36 million to mitigate foreign exchange risk or future foreign currency -- sorry, for future local currency expenses in Asia.

On these forward contracts, we have gains of $1.8 million based on March 31, 2010 rates, which are not recognized. And these gains are not recognized in the books. Finally, our total production headcount at the end of Q1 was approximately 5,500 compared to 7,100 at the end of December '09. Now, let me open the line for questions. Thank you.

(Operating Instructions). And we'll take our first question from Tim Clarkson, Van Clemens.

Hi, guys. I was just wondering -- I wasn't clear. Were there any actual cash expenses from the lost contract in the first quarter?

O'Neil, do you want to take that?

Total revenues for the lost --

Tim, can you just repeat the question?

Yes. Were there any incremental expenses? I know that you spent some money on that contract that disappeared. And I'm just wondering were there any incremental expenses in the first quarter that were associated with the loss of that contract?

Hi, Tim. There was no incremental expenses. In fact, what we did was we were able to align some of the costs down. But we did not get the benefit of that. We took action. But some of it will be realized in Q2. So, to answer your question, we did not incur any incremental expenses.

Okay.

I think, Tim, you may be asking whether we incurred any expenses at all, not incremental, necessarily. Is that right?

Yes. I'm just wondering whether expenses that occurred in the first quarter associated with this loss of this contract that you wouldn't necessarily expect in the second quarter are going forward.

And the answer to that is yes, several hundred thousand.

Okay. And in terms of your prospects for new business, I know that you've got two sources. One is the smaller recurring-type business, and then the other the project business with your large customers. How many salesmen are out in the field now driving new business?

It depends on how you count them. There's 12 or 13 people that are directly sales-driven. And working in close conjunction with them are other people that have more of an account management function and the support function. And in the types of business that we're trying to drive, those functions are becoming increasingly critical. Several of our new, somewhat largest opportunities don't even have sales people involved in them. They have the business people who are working directly with some of our large relationships. And I think what we're seeing is that the opportunities that excite me are large and strategic.

They're some of our largest, most respected clients saying that they want to work entirely differently and that they want to work with us differently. And that difference is more strategic. It's more holistic. And it really pulls from some of the strategic capabilities that we're putting together, including the consulting and the IT capabilities.

Right. And I know another dynamic you guys haven't talked much about was the economy itself. Are you seeing signs that there's a bigger appetite for business spending in general just because of a better economy this year versus last year? Or isn't that as much of a factor?

It's a great question. We're so deep in the woods we don't necessarily see the trends. But in the meeting that I had today with high-level people from a $4 billion or $5 billion publishing company, what they were telling me I thought was very interesting. They were saying that they really -- they had 1% revenue growth last year. And they were used to a steady diet of 6%, and that others of their competitors were less lucky in retrenchment. And they're saying that that really affected the psychology. It affected the spend, especially on new product development.

But most critically what they said was that they're seeing signs of pickup, that they're feeling much more positive in their outlook now, that this publisher in particular is a legal publisher. They're saying that the law firms, which saw -- are their customers -- saw a 10% decline last year are seeing business coming back. And that trickles down to them. And that trickles down to us on the product development side. At the same time, they're still profoundly committed to cost reduction. And that has strategic impact for us, as well, because we can help them get there.

Right. Right. On a last note here now, and I'll let the queue go to other people, as you know I'm always a proponent of buyback on the stock when it's at a low point. And historically that low point has been around one-time sales where you're about at. So I encourage you and the Board to look at that as an alternative, especially vis-a-vis maybe riskier acquisitions.

I assure you it's going to be on our agenda at our very next Board meeting.

Okay. I'm done. Thanks.

(Operator Instructions). We'll take our question from Joe First, First Associates.

Good morning, gentlemen. The problem, obviously, over the first year is that we've had four straight quarters of decreasing revenue. And basically the bottom line has been caused by the drop in business and your two major customers from $12 million a quarter to $4.5 million a quarter. Can you expand a little bit on the prospects with these customers as being able to increase from current levels at all? Is it one customer that's most of the decrease? Or is it both of them? And what are you doing to try to get more business from them?

And then the second question would be this particular client you were just talking about, is that or some of the other potential customers ones that could replace these two as two of the top customers or be in addition to, I should say?

Sure. Good morning, Joe. I think the large client that I was referring to in terms of my meetings today is not one of these top two. And I think potentially it certainly could become one of our larger clients going forward based on what I'm hearing. In terms of the top two, our relationships with those customers are very good. Our execution is solid. And the things that have driven the revenue decline are unfortunately well without our control, much more controlled and influenced by their budgeting. They're in product development which, again, I do think has a basis in their perceptions of the economy and their perceptions of their outlook.

Now, I'm hopeful that that turns around. And we're certainly covering those accounts real well. And we're going to continue to do so. But what I am emphasizing to my team and I'm emphasizing to investors in our conversations is we're not going to rely on hope. We're not just going to sit there and hope that it comes back and try to predict when it's coming back and all of that because it's somewhat outside our control. We're focusing on everything else that we can be doing. And the disappointments we had in March were very significant.

But I'm doing everything in my power to pick up my team and dust them off and say, "Here's our opportunities. That hasn't changed. We stumbled. But the opportunities remain. The relationships are there. The market's perception of our franchise has only gotten better. And there's a lot that we can do to capitalize on that."

Okay. Good. And then I would also reiterate if you have been unable to get any accretive acquisitions at reasonable prices that you do use some of that money to buy back your stock because as Tim Clarkson said, that stock always seems to be a good buy at this level of price to sales, and so on. And if the future is as good as I think it could be, it would be a good time to do it. Thank you.

Thank you, Joe.

We now will take our next question from Charlie Pine, Van Clemens.

I've got a couple of questions regarding your e-books segment. How much did you actually -- did you estimate that you actually realized in revenue in the e-books segment in Q1?

Charlie, I don't have that number in front of me. O'Neil, I don't know if you do in New Jersey.

Yes. I do. Charlie, this was approximately about 11% of our total revenues.

Okay. And how did that compare sequentially to Q4?

Just to give a little bit of background on the e-book, it can be lumpy at times because of the fact that some of our clients have come to us and said that, "Get this quickly done." So, it can be -- it can go up and down between quarters. But for Q4 to Q1 it was flat at 11% of revenue.

All right. You folks mentioned that you're doing e-book work for basically most of the platforms that are out there right now. And you even mentioned the iPad on the call for the first time. A couple of questions regarding that specifically. Number one, what are you doing regarding the iPad? How many of the publishers are you working with there? And by the end of the year, do you have any numbers that you can give us as far as what you see as far as percentage of revenue contribution in e-book business, say, from the 11% number in Q1 and what that could be in Q4?

Sure. I don't have an exact count of how many publishers we're working with. But one of the benefits to the way that we're working and the way the relationships evolved is we started our relationships with some of the device manufacturers many years ago, actually. And over the course of the last year or 18 months, we put in place relationships with most of the other new entrants into the field that had devices. And a lot of these guys have publishers coming to them wanting to be part of their platform. And the device manufacturers refer those publishers to us.

So, the great benefit of that is it's enabling us through that referral mechanism to form new relationships with new companies. I don't have the count of how many new companies we're working with on the basis of those referrals. But it's a significant number. It's a little bit hard to predict where our e-book revenues will be by the end of the year. I mean, we're looking to increase the number significantly. I am trying to remember exactly what we have in our plan. It's a number that's well in excess of 50% or 60% growth in that segment. That's what we're thinking can be achieved. I don't remember the exact number.

But I think the real opportunity there and one that we're following very closely and that we're involving ourselves in discussion with customers is how do we take the ground soil interest in e-readers and e-books and this format coupled with the opportunity to create a new experience, a much more visual experience than they've seen in the past thanks to Apple and prospectively some other companies, as well, and help some of our even most traditional existing publishers reinvent the way they distribute information? And I think that opportunity will potentially be much larger than the opportunity that we now have just helping trade book publishers convert titles.

Okay. Well, that leads me to one of my last follow-ups. What are you hearing on the street, for instance, from people in the textbook publishing arena specifically as to how those people are considering approaching the iPad?

I think that there's a lot of opportunity that's being perceived in several markets, subset markets of the educational publishing arena, including corporate and alternative education. And, again, I think they see in the iPad the opportunity to create a differentiating experience, more visual, less text-based. And that's very attractive to them.

Okay. Thanks.

And, Charlie, just to add to what Jack said that, as he mentioned, we're working with almost all the major device manufacturers. We have built up a solid referable client base. And the word is spreading around. For example, in Q4 a client came to us because one of their renters was not able to provide them with the [title lines] that they had. And they subcontracted the work to us to get it done. And so what one is seeing here is that there's a huge opportunity with the reputation that we are building in the marketplace for e-book conversions and our ability to rapidly deploy and deliver those.

Let me ask one last thing. What sort of competition are you facing right now in that space? And expand on that a little bit.

I think that we had an advantage by virtue of technology we developed and by virtue of the relationships that we had in place and our execution. Our execution is very solid. We pumped out a lot of e-books very quickly for people at very high quality. Competition will always be there. And I think the important thing for us is going to be continuing to evolve with the evolution that's taking place in the market.

I was part of just yesterday a meeting where my people were demonstrating to me some of the new functionality they've developed to embed video and to create other types of viewing for e-books that's more conducive to educational publishers and ways of further enhancing the e-book experience. And we're working in several initiatives in that regard, both on our own and cooperatively with some of our publishers.

So, I think the competition is a reality. I count on it to be vigorous. I think the important thing for us is going to be our attention to evolution and our attention to where things are going. Several of my managers were very good over the last couple of years at spotting an opportunity. We were investing in e-book conversion utilities and building our own before e-books was really on anyone's radar. And I think those people, their radar is still sharp. And the opportunities they're seeing and the direction that they're seeing things going in is accurate.

All right. Thanks. I'm done.

Moving on, we'll take our next question from Perry Highland from Van Clemens.

Hi, guys. Just a couple of questions. One is are you looking at any acquisitions that could be accretive for you? And then also on the KPO sector, that seems to be more esoteric. But you've had very, very large companies that basically are these actual publishers. And is that business causing any excitement for you?

Sure. I'd like to clarify the last part of your question, Perry. Maybe you could be a little bit more specific.

You've got any large company. You can take anybody; Trillium, [balling], whoever. And basically they're putting out documents, puking out documents, I always like to say. And is that a KPO side of the business that you guys could take over? For instance, 3M would be -- I always liken it as they'd rather sell sandpaper than be publishing documents every day.

Absolutely. Absolutely. And the answer -- I'll take that question. And then I'm going to ask Corey to step in and answer your question about acquisitions, given that that's his principle focus. Everything that you're describing we call internally technical communications. And that's an area where one of my managers, a gentleman by the name of Dwaraka Iyengar is completely focused. He's got a group that's doing nothing other than growing that area. And they're growing it very impressively.

One of the -- they've done two things that impressed me a lot. One is they've expanded significantly the services that they're offering. So, for example, we're now offering very impressive e-learning services that we never offered before. Certainly six, eight months ago we weren't doing that. Now they're doing it with a roster of some very impressive companies.

The other thing that they've done that's very impressive is their sales organization has brought in a number of new logos at six-figure initial booking values. And the new logos are very impressive. I'm under NDA, but companies like 3M. And these are companies which once we've got a toehold, they say and we see opportunities to expand significantly with them. So, I'm very excited about that opportunity. And I think that our focus on content and on publishing shouldn't be thought of as being restricted just to professional publishing. We really, as you appropriately point out, runs across a whole gamut of industries.

Thank you.

Perry, it's Corey here. Hi.

Hi.

The first part of your question about acquisitions, the answer is yes. Jack talked in his remarks about the very good market opportunity that we have in our core market. And we can use acquisitions to help pursue that, both more quickly and with less risk, I think. There are opportunities to talk to potential partners that would help us solidify our market position, ad scale, generate synergies, fill in our presence within certain content verticals. And we expect that there are going to be opportunities to acquire at reasonable prices that afford us some margin of safety and great return on capital. So, the answer is yes. We're actively looking at that and pursuing that.

And this is a last follow-up. Is there anything on the front burner in that market? Or are these just distant possibilities?

Well, I can't be very specific about that. But I would say what I said before. We're very actively pursuing it.

All right. Thank you.

Moving on, we'll take a follow-up from Joe First from First Associates.

A question on the knowledge management. I thought this question was asked. But I must have missed the answer. I know back several months ago you were saying that everywhere you turned around a [rock] people were wanting to talk to you about the knowledge management area. And you were continually getting new clients. What's the status of that currently? Are you still seeing a lot of potential clients in that area?

Yes. We are. And by knowledge management, I think what you're referring to is what I've described now as technical communications. So, we are seeing lots of -- as I was saying to Perry before this, we're seeing lots of new opportunity, new clients in the pipelines, and some very interesting ones. The services we're providing there are KPO in nature, creating e-learning modules, e-learning environments for these companies, as well as technical, as well as IT and consulting that relates to running more efficient in the effect of content operations.

Okay. Thank you.

(Operator Instructions). And it appears there are no further questions. I'd like to turn the conference back over to our speakers for any additional or closing remarks.

Sure. Well, thank you very much, everybody. You know, again, I'll just say that the broad view is that we had some significant setbacks. We've talked about that, that it affected performance in the first half of 2010 certainly. The important thing for us, for my Management Team, is to pick ourselves up, dust ourselves off from that, and to be very focused on these significant market opportunities that we've got.

You know, I have a meeting like I did today with a very important, very large customer who sees value in our franchise, sees value in the work that we've done for them, tremendous value, wants to introduce me to their CEO in the next several days, and wants to expand the relationship in very strategic ways. They're not focused on our setbacks. They're focused on how we can help them going forward. And that's where our focus is now. We're very determined to exploit those opportunities. And we will remain focused on that as we go into the year. Thank you for joining us today.

Thank you. That will conclude today's call. We thank you for your participation.