Innodata Inc (INOD) 2010 Q2 法說會逐字稿

Good morning, and welcome to the Innodata Isogen Second Quarter 2010 Earnings Release Conference Call. Today's conference is being recorded.

At this time, I'd like to turn the conference over to vice president of corporate development, Mr. Corey Luskin. Mr. Luskin, please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen, and O'Neil Nalavadi, our chief financial officer. We'll hear from Jack and O'Neil, and then take your questions.

Before we begin, I would like to 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.

I would now like to turn the call over to Jack Abuhoff. Please go ahead, Jack.

Thank you, Corey. Good morning, everyone. Thanks for joining us today. I'll begin with a run-through of our second quarter results, and then provide an update on where we stand overall as we start the second half of the year. I'll also briefly comment on the share repurchase authorization, which we described in our press release this morning.

In terms of reported results, our second quarter was essentially a carbon copy of our first quarter. Revenue was $15.4 million, roughly in line with the $15.5 million we saw in the first quarter. For all practical purposes, there was essentially no change in the composition of revenue between the first and the second quarters. Recurring revenue constituted 73% of total in the first quarter, up slightly from the first quarter, and our top two customers contributed 29% of revenue in the second quarter, just as in the first quarter.

Our cost of sales in the second quarter was $12.1 million, down from $12.3 million in the first quarter. As in past quarters, our cost of sales at this point reflects some ongoing expense related to investments and new capabilities, including consulting, content technologies, and technical communications, which we view as long-term investments.

Gross profit was $3.3 million in the second quarter, compared to $3.1 million in the first, keeping our gross margin right at 21%. SG&A expenses were $3.8 million in the current quarter, compared to $4.1 million in the first quarter. The sequential reduction is as a result of the timing of certain expenses, such as audit fees and marketing. As a percent of sales, SG&A was 25%, down from 27% in the first quarter.

We showed a pretax loss of just under $500,000 in the second quarter, compared to a pretax loss of $900,000 in the first quarter, with the change stemming primarily from the SG&A improvement I just mentioned. Despite the pretax loss, we booked tax expense of around $416,000 in the quarter related to earnings at our operating subsidiaries. O'Neil will discuss this further in a few minutes.

Our net loss was $876,000, or $0.03 per share, in the second quarter, compared to a net loss of $1.4 million, or $0.06 per share, in the first quarter. Cash flow from operations in the second quarter was $1.5 million, an increase of $1.1 million from the first quarter. In terms of our balance sheet, cash and equivalents and investments increased to roughly $27 million.

The die for the first half of the year was largely cast in January, as a result of the project cancellation we've discussed in great detail on our previous two conference calls. The project cancellation left us unable to fill the void created by the decline and spend from within our top two customers.

Looking over our shoulder on the first half of the year, it is clear that our pipeline activity was slower than usual as well. A number of our clients, even with the strongest of franchises, struggled with the implications of a 2009 in which they experienced little or negative growth, some for the first time.

As we look out at the second half of the year, however, we're seeing pipeline improvement, both in terms of addressable opportunities, as well as pipeline velocity. Clients seem to be regaining some momentum in both new product work and operations reengineering which give rise to the need for our services.

The renewed level of momentum is evidenced in a couple of ways. For example, in the past couple of months, we've had four clients, all over $1 billion in revenue, meet with us in our Israel or Asia offices to discuss significant new requirements. One client brought a large delegation of senior decision-makers; another brought its president and CEO.

In each of these cases, the visits kicked off a series of additional meetings and collaboration, which hold the promise for new engagements. In addition to this, in the past couple of months, we've begun discussions with some exciting new prospects as well; large companies, whose names you'd no doubt recognize if I were at liberty to disclose them.

In terms of revenue level from within our top two customers, a source of significant ups and downs in the past, we see clear expansion opportunities with one; with the other, there's expansion opportunity and discussion around it. But, whether the revenue goes up or down or stays the same will be determined largely based on the outcome of their internal business planning that we can't influence.

From Q1 to Q2, we were flat. The business could grow significantly, but it could also diminish. Our performance, which is what we control, remains strong.

Now, if we think about the medium- and long-term, our destiny will be shaped ultimately by the strength of the franchise that we're building. My executive team and I continue to believe that we have what it takes to become a company comparable in size and reputation to some of the world's leading global services companies.

And we continue to believe that our vision is the appropriate path by which to get there; being the category leader, helping content-dependent and content-centric companies across media, publishing, information services, and educational and commercial publishing with complex content requirements.

Our service offering now spans project strategy, scope, and requirements analysis, technical design, content architecture, technology implementation, and support, as well as the mainstays of content operations, preparation, analysis, and creation.

In the last couple of months, we saw important validation for the strength of both our franchise and our vision. We were selected by the United States Government Printing Office, or GPO, to provide the first task of a major effort to replace one of their core publishing systems.

The GPO probably qualifies as one of the largest publishers in the world, in terms of daily volume and complexity, providing publishing and electronic dissemination services for all three branches of the Federal Government and Federal Agencies.

The selection process was competitive, and the GPO standards were high, that we were selected testifies strongly to the strength of our franchise. And the credit for this win goes squarely to our new consulting organization, working in concert with our sales team.

We're also seeing market validation within our e-book practice area, where our strategy is to be relevant to three markets. The first market is traditional publishers. On almost a daily basis, we're increasing the number of traditional publishers that do business with us. Just yesterday, Bob Kidd, one of our senior executives in the publishing area, stopped by my office to tell me we signed up 13 new publishers just that day.

All-in-all, thanks to e-books, in the past seven months, we've begun doing modest levels of business with 137 new publishers, delivering selections of their content to the major e-book distribution platforms.

The initial service we provide to these new traditional publishers involves e-book conversion, which is essentially the process of preparing a book to work properly in a device and take advantage of all the device's features and functions. This work can range from straightforward to reasonably complex, depending upon the source data and the variety of bells and whistles that are included.

We anticipate that as e-books become a proven investment for them, they'll expand the conversions that they do with us. We also anticipate that as e-books become richer media, there will be more ways for us to add value to this manufacturing process.

Beyond expanded conversion activities and richer media capabilities, though, our strategy with these traditional publishers is to penetrate and radiate. We are using their initial e-book conversion needs as a springboard from which to address other aspects of their content supply chains, in order to bring them additional value while bringing us additional revenue.

The second of these three addressable markets within the e-book area is the e-book store and device manufacturer market. Our strategy in this segment is to become a trusted partner to the companies that are likely to survive the inevitable consolidation and shake-out within the space. And I think we've done a reasonably good job here. We have trusted relationships with both Amazon and Sony, and are in planning stages with a couple of additional potentially high-profile players.

It's hard to say who will prevail in this, or exactly how things will shake out in this rapidly developing space. For example, last September, we announced on a no-names basis a deal we had signed with FirstPaper, an investment of First Publishers, which later changed its name to Skiff.

Back in September, Skiff had asked us not to use their name, as they were trying to operate under the radar as they finished work on their device and their distribution platform. The Skiff platform debuted at the Consumer Electronics Show earlier this year. It's an 11.5-inch e-reader, just a quarter-inch thick, and actually flexible -- not in the abstract sense, but physically -- so designed to suit perfectly the newspaper and magazine reading experience.

Skiff had estimated needing about $4 million of work to be done by us over two years to create content for their Skiff store. But since that time, they only provided us requirements for $100 million or so of work -- $100,000 or so of work, excuse me,. Just last month, their distribution platform was acquired by News Corporation. It's not clear what the implications are for us with this acquisition. So until we find out, and to be conservative, we're going to back out the $4 million from our backlog entirely.

To illustrate how dynamic this market is, however, at the same time we were seeing uncertainty from the Skiff acquisition, we started delivering content for publishers to a more recent entrant to the device and bookstore space -- a company that is now a household name. Direct discussions with this new entrant have expanded, and we're confident in our ability to help them on multiple fronts.

Our third addressable market for e-book services is our core constituency of large information companies. Here, our strategy is to help them mobilize their content for new products delivered over portable devices. For example, just recently, a major information company selected our content technologies team to develop an e-book e-reader infrastructure for one of their important product sets.

While winning the confidence of major clients is perhaps the greatest evidence of the value of our franchise, another important indicator is our ability to attract top talent. On this score, we're pleased to announce that Jim Lewis has recently joined the Company as Senior Vice President, Sales and Marketing.

Jim has more than 25 years of experience in executive positions with responsibility for global sales, marketing, and operations, most recently as EVP of Sales and Marketing at Netrics, the search optimization and data matching company, which was acquired by TIBCO in 2009. Jim also served as President, CEO, and a member of the Board of Directors for New York Stock Exchange-listed Berlitz International.

While at Berlitz, Jim grew their services division 156% in three years through a balanced combination of organic growth and tactical acquisitions. And prior to that, Jim was president of GlobaLink, an AMEX-listed company, and Vice President of Marketing for Maxim Systems, a network technology company.

While he's a (inaudible) of our staff, Jim is not new to Innodata Isogen. He previously served as President of Princeton Sales Partners, a sales training consultancy that he founded to help clients in North America, Europe, and Asia implement revenue improving sales processes. In this capacity, Jim served as a consultant to Innodata Isogen over the past few years, providing sales process training to members of our sales staff and customer facing operations people as well.

He has strong knowledge of our company, our people, and our values, and I expect that he'll be able to hit the ground running. We're excited to have Jim on board. Jim's experience at building and driving high-performance sales teams is impressive. He has literally written, if not the book on it, a book on it, which is available on Amazon. I'm confident that his hands-on, in-the-field approach, along with his extensive understanding of how to improve the buying experience for customers, will enable us to accelerate growth and serve a progressively wider audience.

At the same time, his presence will free up some time for Jan Palmen, a veteran of the content services space, and one of my senior executives, who will begin focusing on high-value, repeatable solutions within the dynamic e-publishing space. He'll be working closely with our content technologies team and other areas of the business to address various emerging requirements across our markets. Expect to see us issue a press release later this week on Jim's joining.

Now, in terms of our content technologies team, a key aspect of our strategy is migrating from point transactions to integrated solutions for our clients and increasing the benefits derived from technology. In the last several months, our content technologies team, under Mike Abell's able leadership has received kudos from several clients for whom the team was able to address particularly thorny content-related challenges. We are seeing a solid return on our investment here, which we intend to step up over time.

As you would have seen in our news release this morning, our Board of Directors has authorized a share repurchase program in the amount of $2.1 million. In our last repurchase program, we bought back approximately $1.9 million of stock under a $2 million authorization. This action emphasizes the Board's confidence in our future prospects, as well as the strength of our balance sheet, which it believes is sufficient to pursue both this repurchase program, as well as organic and inorganic investment opportunities.

I'm going to hold off on giving a discreet guidance estimate for third quarter revenues at this point. There are too many moving pieces to put a number on the quarter or the year. We think that for right now, we will be serving our shareholders best if we focus attention on our strategy, how it is validating in the market, and the concrete steps we are taking to create value.

Now I'll turn the call over to O'Neil, who will provide additional insight into the numbers. O'Neil?

Thanks, Jack. Good morning, everyone. Again, thank you for joining us today to review our second quarter financial results. Jack just shared with you an overview of our performance and our perspectives on the business. Let me share some thoughts from a financial perspective, and then I'll review the key line items on the financial statements.

First, our revenues have been flat in the current quarter for reasons explained earlier by Jack. We continue to see attractive business opportunities and we are winning new customers at a healthy pace, but we are also experiencing some customers' being cautious with their budgets. And as a result, we cannot predict with absolute certainty the net goal in revenues.

Our key focus is to guard revenues and margins, as our return to profitability depends on achieving that. Second, as our revenues are flat, the movement in gross margin was also very slight in the current quarter compared to Q1.

Pretax losses narrowed from approximately $900,000 to $500,000, which was primarily a result of lower SG&A expenses, combined with slightly higher gross margin. We improved cash generated from operations quite significantly to $1.5 million in the current quarter, compared to $400,000 in Q1.

Finally, in reviewing our financial statements, I will focus on the sequential changes from the last quarter, 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 Q2 was $15.4 million, compared to $15.5 million in Q1. Revenue from our top two customers was roughly steady at $4.5 million, or 29% of total revenue in both the quarters.

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 73% from approximately 71% in Q1. There was no change in our gross margins. It was 21% of revenues in both Q2 and Q1.

Now, let us drill down to selling and administrative overheads. SG&A expenses were $3.8 million in Q2, compared to $4.1 million in Q1. The sequential decline in Q2 of approximately $300,000 was primarily due to the timing of certain expenses, such as incentives, license fees, marketing, and audit expenses, and it does not represent a permanent reduction.

Moving down to pre-tax earnings, our pre-tax losses reduced from $900,000 to $500,000 in the current quarter, which was a result of lower SG&A expenses referred to earlier and slightly higher gross margins.

Let me now review our tax provisions. We estimate our respective tax rate to be in the range of approximately 28% to 30%. In the current quarter, despite pre-tax losses we accrued for tax expenses approximately $400,000, compared to $500,000 in Q1. The reason for this accrual is because the US parent entity and some of our international subsidiaries made profits and others sustained losses. So we accrued for tax expenses in each subsidiary, in accordance with the tax laws of each respective jurisdiction.

Getting down to net earnings, our net loss for the quarter was approximately $875,000, or $0.03 per diluted share, compared to a loss of $1.4 million, or $0.06 per diluted share in the first quarter.

Let me now review our cash flows in the balance sheet. Though we incurred a net loss of $875,000 in the current quarter, we generated cash from operations of $1.5 million. This primarily came from an add back of depreciation and amortized expenses of $1 million, a reduction in account receivable balances by $300,000, and other changes in working capital of $1.1 million. This is a significant improvement compared to cash generated from operations of $400,000 in Q1 and cash used in operations of $800,000 in Q4 of '09.

We incurred capital expenditure of $300,000 in Q2, primarily on software and hardware in our global production and delivery centers, compared to $900,000 in the previous quarter.

Now, looking at our liquidity position, we ended the quarter with $27 million in cash, cash equivalents, and investments, compared to $25.8 million at the beginning of the quarter, an increase of $1.2 million. We [entered] the quarter with accounts receivable of $10.1 million, compared to $10.4 million at the end of last quarter.

Our Day Sales Outstanding, or DSO, decreased to 64 days in Q2 from 65 days in Q1. Working capital at the end of the quarter was $29 million, compared to $31.9 million at commencement.

We maintain 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, would provide sufficient sources of liquidity to satisfy our financial requirements for the next 12 months.

Now I want to share a couple of key items that are not line items in the financial statements. First, we have approximately $4 million of carried-forward tax NOLs in the US, which we view as a tax shield in future years. Second, as of the end of Q2, we had foreign currency forward contracts worth approximately $35 million.

These contracts are taken to mitigate foreign currency risks associated with future local currency expenses in our global production centers and Asia. On these forward corporate contracts we have gains of approximately $100,000 based on June 30, 2010 rates, and these gains are [not] recognized in the income statement.

Now, let me open the line for questions.

(Operator Instructions)

We'll take our first question from Jay Harris with Goldsmith & Harris.

Good morning, Jack.

Good morning, Jay.

I take it from your comments and O'Neil's comments on tax rate that you're looking for a -- even though you don't want to be specific on third quarter revenues and your results -- that you're looking for a better last half than the first half?

Well -- and I hope you don't take this facetiously, Jay, but we're going to certainly be looking for better results than we've shown in the first half as we go forward.

All right, because you're talking about, what, a tax rate of -- what, 26% for the year?

Yes. I let O'Neil talk about the tax rate, but I don't think you should read too much into that discussion. That has more to do with the way that our subsidiaries are organized and some issues we have with the way taxes are estimated or imposed, specifically in India. O'Neil, do you want to --?

Yes. Hi, Jay. When we talk about the effective tax rate, that will be our effective tax rate as we -- go on a medium-term to long-term basis. But in the short run it will be -- it will depend on the profits that we will make in some subsidiaries, and while some of the subsidiaries have sustained losses. So this year the effective rate could be different to our medium-term to long-term effective rate of 28% to 30%.

Do you have a rate that we should use for this year?

You know, like I explained in my call, for the first half, although we had pre-tax losses, we still had to accrue for tax provisions. So this year, at best, is an aberration, and to the -- the effective rate will not be the right way to compute our tax accruals for this year.

Okay. Jack, coming back to -- how do you intend to communicate going forward when you have a better handle on what your revenue range might look like in the third quarter? How do you plan to communicate that?

You know, there are a lot of discussions that we're having about how best to communicate, and I think that the key in communication is going to be to provide as much transparency as we can while, at the same time, communicating the uncertainty that exists around -- in the markets at these times.

And while we do that, we also want, though, to project the confidence and the strength we have in our strategy and our vision. We don't want to become too focused on the very near-term results that may not be within our ability to project accurately and lose focus on the strength of what we're building here.

So in today's prepared remarks, for example, we tried to highlight some of the things that I think clearly testify to the strength of the franchise and the strength of the vision, among which is the GPO opportunity that we discussed.

Can you comfortably talk about a revenue level that you hope to achieve over the next two years?

You know, I think that, right now, we're not going to try to put a number on it, Jay. I think what we will want to emphasize, though, is that we think that we have the positioning and the franchise to become, as I said before, a company comparable in size and reputation to some of the world's leading global services companies. And that's the vision that we're embarked upon, and that's the level of ambition that we're going to hold ourselves to.

Jack, this is Phil Goldsmith.

Hi, Phil.

Hi. Going out over the next few quarters, do you foresee a broadening of your customer base and the top two customers becoming a lesser percentage?

Yes, I think it's important that we look as a -- that we have as an objective to become less concentrated in any single or any small group of customers. That's an important objective that we have.

And we think that the combination of the talent that we're acquiring and the work that we're doing in sales and marketing, combined with the broadening of our services capability, and becoming more focused on key accounts and the ability to influence those key accounts and provide a consultative type of experience to those accounts will, in fact, accomplish that result.

Thank you.

We'll take our next question from Tim Clarkson with Van Clemens Capital.

It looks like things are at least stabilizing, and I like that buyback. I wanted to ask, in terms of this strategy of creating more repeatable business versus project business, could you just go into a little bit more depth as -- what are the things you're doing to make that happen?

Sure. There are a number of different -- strategically the way we look at our progression is that there are projects, and in a level elevated above that are accounts, and in a level elevated above that still are markets. And a lot of what has consumed our energies in the past -- and continue to -- are focus on specific, unique, sometimes ad hoc projects.

We're progressively elevating our focus as an organization to key accounts. And I think, as I said in response to the last question, we'll see that an effect of that is to reduce concentration into few key accounts.

Beyond that we're seeing that there are opportunities for taking specific challenges that are faced not by even a single account, but that are faced by the market, and crafting technology-enabled services around those, such that we can configure a set of capabilities and run multiple requirements through that set of capabilities, extracting better margins through that process.

So we're beginning to staff that initiative with some key people, and we believe that that holds great promise for the Company.

And these would be unique and proprietary products and services that Innodata would have?

That's correct.

Right. Now, in terms of this new GPO, is there a potential for this customer to be on the same level as some of your other big customers, like Amazon?

We believe that there's significant potential there.

Okay. I'm done, thanks.

I'll take our next question from Joe Furst with Furst Associates.

I wanted to ask -- also comment on the stock buyback. I'm glad to see that you're doing that, since you have [over $1] share in cash and the stock is exceedingly cheap, I believe. Secondly, the E-book business. Currently, in the last quarter, did that run -- something under $1 million? It's pretty small right now, isn't it?

The total -- what's the question, Joe, again I --?

Your e-book business. I assume that right now it's pretty small. Isn't it under $1 million or so?

It is approximately 14% of our total revenues. I think I put the number wrong. Jack said $100 million but it was something -- he said it by mistake.

Oh, 14% would be about $2 million.

That is right.

Right. Okay, so it's more than I thought, then. And it seems to me there's some significant growth associated with that business. And another question --.

That is for this quarter, yes? This is 14% of our revenues.

Correct. And then, your two largest customers, that basically was $4.4 million. Is that about equal between the two of them, or is it much more one than another.

It's about in the same range. One is a little bit marginally higher, but together they come around 29% at $4.5 million.

Right. Right. Okay, and it seems to me, I understand you're seeing much more opportunities in the knowledge management area and in the repeat business-type of work that you do. Is that correct?

That's correct. We're seeing additional opportunities there, as well as other aspects of the business.

Good. Okay, thank you.

(Operator Instructions)

We'll take our next question from Charlie Pine with Van Clemens and Company.

Hi. I just want to go over a little bit more about the information you talked about on this deal with the GPO. A lot of it kind of came by fast and furious. Can you just kind of retouch on the prepared remarks about specifically what this deal was again, and who you're replacing, and how you were selected, and what you see coming with this?

Sure. We're not replacing somebody so much as we're helping the GPO replace their publishing technologies and the related systems that they use within the organization. It's a very significant undertaking. You can go to the GPO's website and read about some aspects of it. And what we mentioned in our prepared remarks was that we were selected in a competitive tender situation to help them with the first task that relates to this very extensive effort.

What is that first task, then?

The first task involves some requirements analysis, as well as solution architecture.

And how long -- as it's stipulated right now, what's the term of this contract? How long does it run?

You know, I don't have the contract in front of me, but most of the activity that we're talking about is going to be taking place in the back half of this year. By end of October or early November, I think we'll pretty much be through most of that.

Okay. Are you cautiously optimistic that you'll be doing more with the GPO in extending with this in 2011?

Yes, I am.

Okay. How many other companies were you bidding against for this piece of business?

We're not certain. There were probably five or six other companies -- notable companies involved. We never got a list, but our indications are that there were five or six and, some very significant companies, at that.

All right. Is this the sort of thing, because it's a government contract, that we're able to go out and see what the size of this award was?

Yes. I believe that's correct.

All right. Where can we be directed to find that information?

I don't have that in front of me, but if you can give me a call after today's call, I can get that website for you.

Okay. A couple questions in the e-book area. You stated that you currently now are doing e-book conversion for -- did I hear right -- 137 publishers?

137 new publishers that we weren't doing any business with before that we're now doing business with, and that's this calendar year.

Oh. All right. So, in total, how many publishers are you doing e-book business with right now?

I don't have that number in front of me, but I'd probably add another ten -- I don't know; we'll have to get that for you also. Probably another 20 or 25 on top of that.

So seeing that -- with a lot of these publishers, though, the amount of actual business that you're doing with them in the e-book area, seeing as how there's a fairly large number of these, this is -- for each publisher a lot of this is fairly token amounts of revenue.

Of those, say, 150 or 160 total publishers, what's the concentration and how does it break down? Is most of the business being done with five of them, with ten of them, with 20 of them? How would you characterize that?

You know, I think it's -- there's some amount of bell curve within that, but I think the important thing there is, a lot of these new relationships for us are actually being driven by some of the large book stores who we're partnering with. So, they're helping to steer these relationships our way so that we can help with the requirement to deliver content to the bookstore.

What's important right now for us relative to our strategy there isn't the revenue that we're deriving from any one of these, even some of the larger ones in e-books today; instead there are three things that we're looking for. The first is that, as they're successful relative to their e-book sales, we expect they're going to want to do more e-books, and we're seeing that as we speak.

The second thing is that we believe that the notion of what an e-book is is going to change significantly, and we're going to be prepared to imbue the e-books with richer media, more high-fidelity experience, and that will create revenue opportunity.

And then the third is, we're trying to take advantage of the fact that we're having just this year 137 new conversations with new people, and to figure out ways that we can work with those people to look at the entirety of what we call their content supply chain; how they originate content, how they author content, how they manufacture and distribute it, and figure out ways to be helpful to them. And, again, we see that as an opportunity for growth for us.

Okay. I just have a couple other questions in the e-books space. I think in the last call or maybe in some other conversation, it was somewhat implied or discussed that you are working with some of the original publishers that were involved in e-books for the iPad. Are you still doing stuff in that area?

Yes. We've been -- this past several months, we've been delivering content to the iPad.

How many publishers are you working with right now that are putting - that are using the iPad as a publishing platform?

I don't have that number right now. I think, though, that that number is small. It's somewhere in the area of about five to ten publishers, and, again, we're expecting that that will be on the increase.

Okay. What about in the area outside of just the traditional book publishers? Are you doing anything in the area -- are you working with anybody in conversion work or in the magazine or other types of publications for platforms -- well, specifically, for the iPad, which seems to be a pretty interesting feature-risk aspect of the iPad right now?

We're working with several publishers on non-book requirements, and those range from what you might refer to as magazine format to newspaper-type format to journals and work-flow-enabling applications. And one of the drivers for much of this activity is the capabilities that the iPad and perhaps some similar devices in the future will create.

(Operator Instructions)

We'll take our next question from Jay Harris with Goldsmith & Harris.

Jack, where are we in terms of applying e-book techniques to the field of education?

We see that as an area that we can expand into somewhat significantly, Jay. Clearly, the portable device capability and functionality is something that's very interesting to the educational market, and that's a market that we intend to pursue.

In terms of where we are with that, our penetration into the traditional education space, when it was mostly composition and print, has never been as significant, because it was a largely commoditized market. But given the potential to create these higher fidelity kinds of applications in concert with some of the work that we're doing, for example, in e-learning, there is a clear possibility for us to be more penetrated into that market going forward.

Does this offer significant cost reductions to educational institutions, or to students?

I think that it probably does, relative to avoiding cost of print and also avoiding the cost of -

Distribution.

-- the distribution costs, but also the hidden costs of reuse. It enables publishers to recapture some of that. There's no such thing as a used book store at some point. So it is considered an attractive market potentially to many large education publishers.

Are there any of those publishers that appear to be at the leading edge of exploring this conversion?

We're looking to get work from and to partner with several of them, so I don't think that I'd want to go out on a limb and declare a winner in that race right now.

Okay. Thank you.

We'll take our next question from Charlie Pine with Van Clemens and Company.

Charlie Pine. Hi. I was cut off at the end of that last question. I was just curious, are you working specifically at this point with any particular magazines right now that are being published on the iPad?

Any particular magazines? No, we're not.

Okay. All right, thanks.

And that concludes today's question and answer session. I'd like to turn the call back to Jack Abuhoff for any closing remarks.

Thank you, operator. Thanks, everybody, for joining. Just to recap, we're seeing pipeline improvement, as we've discussed, both in terms of addressable opportunities, as well as pipeline velocity. And we think that will bode well for us over the next several months. I talked about how we hosted four delegations from clients -- all clients over $1 billion revenue -- in the last couple of months for discussing some significant new requirements.

Our revenue level from within our top two clients, which, as we all know, has been a source of significant ups and downs in the past, continues to be uncertain. We see clear expansion opportunity with one of them; with the other there's discussion around expansion. But whether the revenue goes up or down or stays the same will be determined largely based on the outcome of their internal business planning, and we can't influence that.

We continue to see positive validation of our strategy in the marketplace -- our success with the Government Printing Office, the GPO, clearly shows the strength of our franchise and underscores the promise of our expanded capabilities.

And finally, I'd just like to welcome Jim Lewis to the Company. With 25 years of executive management in the sales and marketing area under his belt, combined with his knowledge of our company, I'm confident that he'll be a great asset to our organization going forward.

I think that's it. With that, I thank you all for your time and interest this morning, and I'll look forward to our next call.

That concludes today's conference call. A replay will be available starting at 1 PM, July 27, 2010, and ending August 26, 2010. You may access the replay by dialing 1-719-457-0820 or 1-888-203-1112, and entering the passcode 9974628. Once again, the phone numbers for replay are 1-719-457-0820 or 1-888-203-1112, and enter the passcode 9974628. Thank you, and have a good day.