Innodata Inc (INOD) 2011 Q3 法說會逐字稿

Good morning and welcome to the Innodata Isogen third quarter 2011 earnings release conference call. At this time, all participants are in a listen-only mode. Later there will be an opportunity to ask questions.

(Operator Instructions)

Please note today's conference is being recorded. And at this time, I would like to turn the conference over to Ms. Amy Agress. Please go ahead.

Thanks, Mark. Good morning, everyone. Thanks for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata Isogen and O'Neil Nalavadi our CFO. We'll hear from Jack and O'Neil and then take your questions. First, let me qualify the forward-looking statements that are made during the call.

These statements are subject to risks that include the primarily at-will nature of the Company's contracts with its customers and the ability other customers to reduce, delay or cancel projects, including projects which the Company regards as recurring, continuing revenue concentration in a limited number of clients, continuing reliance on project-based work, inability to replace projects that are completed, canceled or reduced, depressed market conditions, changes in external market factors, the ability and willingness of our customers and prospective customers to execute business plans that give rise to requirements for digital content and professional services and knowledge processing, difficulty in integrating and deriving synergies from acquisitions, potential undiscovered liabilities of companies that we acquire, changes in our business or growth strategy, and the emergence of new or growing competitors.

Our SEC filings also mention other risks. Actual results may differ significantly. Thank you. I will now turn the call over to Jack Abuhoff.

Thank you, Amy. Good morning, everyone. Thanks for joining us today. I'll begin with an overview of our third quarter 2011 results. I'll provide some perspective on fourth quarter projected revenue and then provide an update on our progress in our three-year strategic plan.

Revenue in the third quarter was $19.2 million, which was a $3 million or 18% sequential increase over the second quarter. We also saw a sequential improvement in gross margins from 30% to 33%, and we doubled our pre-tax earnings from $900,000 to $2 million.

This was our third consecutive quarter of improved financial results. And these numbers include costs attributable to our new IADS business segment that is in the nature of investment. These costs comprised about $800,000 of operating expenses that flow through the third quarter P&L, and another $950,000 of cumulative capital investment. The IADS segment has not yet contributed to revenue. We anticipate that it will begin contributing to revenue during the first half of next year.

So third quarter's 18% sequential quarterly revenue increase is attributable to work we're performing for two important recent clients. About 80% of the increase came from one of these clients for whom we're performing eBook-related services. And about 20% of the increase came from another recent client, a major accounting firm with whom we entered in to a multi-year engagement late last year.

Our margin improvements are coming about as a result to our commitment this year to strict pricing discipline as well as process automation. Looking out to the fourth quarter, we're projecting revenue will be $20 million or more. During each of our last two earnings calls I've spoken about our 2011 three-year strategy and the goal which I laid out at the start of this year of making Innodata a $100 million revenue company within the next three years while becoming a truly globally respected business services company. And I've introduced the four key financial objectives and three strategic objectives which comprise our strategic plan. I will now update you on our progress on these objectives. We'll take the financial objectives first. The first financial objective is to increase bookings, the amount of business we win, over 2010 levels by 20% this year and another 20% in each of 2012 and 2013. As you probably know, bookings are not a formal GAAP accounting measure, and because most of our customer contracts don't have fixed committed dollar spends, we estimate each contract's value.

For these reasons, we use bookings as a performance indicator rather than our reporting metrics. During the first nine months of the year the dollar value of the business we booked exceeded by over 50% the dollar value of the business we booked during the same period last year.

The two clients I referred to earlier important contributors to this year's bookings numbers. While we are ahead for the year, third quarter bookings declined from second quarter levels. We are, however, we're getting stronger fourth quarter bookings, and we are projecting we will meet our strategic goal for 2011 of increasing bookings 20% over 2010.

In 2012, we will target to grow bookings in our content services segment by another 20% over 2010 levels, so a cumulative 44% over 2010. On top of this, we are expecting our IADS division to begin producing new bookings and attendant revenue and margin contribution early next year.

The second financial objective is to achieve a labor margin on new bookings that is 12 to 14 percentage points higher than the overall labor margin we in 2010. We met this objective in the first part of the year, and I'm encouraged to report that that we continued to meet this objective in the third quarter.

We're working on several fronts to accomplish this. First, we're instilling in the sales force greater process discipline regarding pricing decisions. Second, we're automating the work that we do, and at the same time we're increasing the proportion of higher value strategic services we provide, finding new ways to combine technology services with our core content KPO services and continuing to emphasize the value that our consulting services group brings to customers.

Our third financial objective is to improve labor margins on the portfolio of ongoing work with which we began the year. Here, too, we're making good progress, but we're a little behind the aggressive internal targets we set for the year.

Our Asia-based engineering group, together with our recently opened technology outpost in Princeton, New Jersey, which is now only three months old, is making significant progress and will likely attain their goals of giving us the tools to improve labor margins on both the portfolio of ongoing work with which we went into the year and the new work that we're bringing in in the course of the year.

Our fourth financial objective is to reduce our overhead spend by approximately $1 million per year. Based on the actions we have taken through the third quarter we have reduced costs when about $900,000 annualized. I'll now turn to the three strategic and market objectives. Our first market objective is to launch new product-type service offerings within our content services segment. We're using the term product test service offerings here to distinguish these new kinds of service offerings from our existing service offerings in the following way.

Our existing service offerings tend to be very highly customized to each client. When we finish a highly customized project for a client there's a lot of learning and even some technology that ends up not being reusable. Product-tied service offerings, on the other hand, will be designed to meet the general market need as opposed to a unique one-off customer need.

This greater level of technology and process reuse will support our growth and profitably objectives. We expect that these new product-tied service offerings will have a shared core technology platform putting to good work investments we've been making in our content technologies area.

In order to support this strategy, I'm pleased to report that Marc Rubner joined us this quarter as our new VP of Product Marketing. Marc brings a long and successful track record of innovative technology product marketing, including more than 15 years of B2B marketing with global leaders at American Express and Blackboard.

In his most recent position as senior director of marketing for Blackboard, Marc led a team of marketing professionals who drive lead generation, demand generation and awareness building. Prior to that, Marc held several product marketing teams at American Express where he launched more than a dozen new technology products in 10 countries worldwide.

Marc earned an MA in communications from the University of Pennsylvania and a BA in political science from Brooklyn College and holds a US patent for his work at American Express. Our second market objective is to launch new information analysis businesses in new markets with a similar emphasis on product-tied service offerings. In our last earnings call I shared with you that we have launched a new segment that we're calling Innodata Advanced Data Solutions or IADS for short, and that under the umbrella of IADS we had launched two new divisions, the first called Synodex and the second called docGenix.

The mission of IADS is to help businesses and industries outside our core information publishing sector reduce risk or otherwise manage key business processes. Consistent with this mission, Synodex will perform a range of data analysis services related to digital medical records, and DocGenix will perform a range of data analysis services related to special kinds of legal agreements commonly referred to as derivatives contracts.

I am pleased to report that in the third quarter our docGenix division closed deals with two large financial services institutions. I am anticipating that IADS will begin contributing to revenue in the first half of 2012. Our plan is for IADS to contribute to revenue visibility and predictability as well.

We're doing a great job in eBooks for sure. We have attained a leadership position in eBook services. We have forged relationships with the world's leading consumer brands, brands we expect will continue to be at the fore of this rapidly emerging space.

But the e-publishing revolution is still the Wild West to some extent, and this can, and likely will, mean associated revenue fits and starts for us. Therefore, to provide balance, our IADS segment will be targeting kinds of businesses that will be easier to forecast medium and long term.

To accommodate our growth in both our content services segment as well as our IADS segment, we are executing a significant capacity expansion plan. This month we inaugurated a small new production facility in Galle, Sri Lanka. And next month we will be inaugurating a larger production facility in Delhi, India. We will further expand the Delhi facility over the next several months.

In a few minutes, O'Neil will give you some insights into the capital we are allocating for this expansion and the revenue uplift potential that it is designed to accommodate. Our third strategic objective is internally focused. We're going to step up our efforts of promoting a stronger, more unified company culture as a means by which to attract and retain top talent and to harness the collective energies of our people.

Top talent in Asia these days have lots of choices in terms of who they work for and where they work. We're committed to making Innodata a preferred employer in all the locations in which we employ talent. And to do so, we're making a host of changes in how we operate, some big, some small.

For example, we are designing our new Delhi production facility to provide the kind of environment which is conducive to hiring and retaining the top talent that we need to provide higher ordered strategic services. You'll also see that we're making changes on how we brand our Company. We will begin doing business as Innodata as opposed to Innodata Isogen. And you'll begin to see updated corporate imagery that reflects this. We believe the simplified name and imagery befits the culture of innovation, velocity and entrepreneurship that we're cultivating. So that's our plan update. I'll now turn the call over to O'Neil, who will provide additional insights into the Q3 financial results. After that we'll take your questions, and I'll wrap up with a few final comments. O'Neil?

Thank you, Jack. Good morning everyone. Thank you once again for joining us today to review our third quarter 2011 financial results. As Jack just stated, this is the third consecutive quarter of continuous improvement in our operating performance. On a sequential basis we saw an improvement in all key performance indicators. Revenues grew 18% to $19.2 million, gross margins expanded 300 basis points to 33% of revenues, and pre-tax profit doubled to $2 million.

I'm going to review with you the key line items in our financial statements. I'll first cover our income statement and then our cash flow and balance sheet. In the course of this review, I will share with you my perspective on company performance, successes and challenges. Once I get to the analysis I will spend a few minutes discussing our capital expenditures, share buyback program, the status of our NOLs and our foreign exchange hedging program.

In reviewing our financial statement, I will focus on sequential quarterly changes as I have in the past because I believe this best portrays the run rate of our business. Should you have any questions on the year or year results, I would be happy to answer them during the Q&A session.

Now for the various line items in the financial statements. Revenue in Q3 was $19.2 million compared to $16.3 million in the last quarter, an increase of 18% or $3 million. The increase is attributable to a $2.6 million increase in our eBook services from one client and $400,000 increase in our KPO services from another client that is a global accounting firm.

Our top three clients contributed $8.4 million or 44% of revenue this quarter compared to $6.2 million or 41% of revenues in the previous quarter. Our IADS business, which is in startup phase, had no revenues in the quarter. We also improved our gross margins. As a percentage of revenues our gross margins increased by 300 basis points to 33% in the current quarter, up from 30% in the second quarter and 27% in the first quarter of 2011. In dollar terms, our total gross margins were $6.4 million this quarter compared to $4.9 million in the last quarter, an increase of $1.5 million or 31%.

So what we see here is the combined effect of the increased volume of new book business and a significant margin improvement on new bookings. Our efforts at instilling margin discipline in our sales process is clearly paying off. As Jack mentioned, we are anticipating further revenue uptick in the fourth quarter. A significant percentage of the revenue increase in Q3 and anticipated in Q4 will come from the eBook services. Having said that, the nature of eBook services is such that clients' requirements can vary from quarter to quarter. So in order to grow revenues in a steady and sustained manner, we are also targeting other opportunities, particularly in IADS.

Now, let me turn to SG&A expenses. Our SG&A expenses were about $4.6 million in the current quarter compared to $4.1 million in the previous quarter, an increase of $0.5 million. SG&A expenses as a percentage of revenues was 24% this quarter compared to 25% in the last quarter.

About $300,000 of the SG&A expense increase is attributable to the investments we are making in our IADS business, and the balance of $200,000 is attributable to additional sales and marketing spend. Total SG&A expenses in the IADS segment was $500,000 this quarter.

Moving down to pre-tax earnings, we doubled our pre-tax profits to $2 million this quarter. This was primarily due to $1.5 million increase in our gross margins offset by $500,000 increase in our SG&A expenses. Pre-tax loss in our new startup IADS was about $800,000.

In the current quarter our tax expense was $770,000 or 39% of pre-tax earnings versus 23% or $230,000 in the previous quarter. About six percentage points of the increase is due to the fact that we earned a disproportionate percentage of our 100% increase in pre-tax earnings in India and the US, both of which are high tax jurisdictions.

And the remaining 8 percentage points of this quarter's increase came about because the sudden surge in the US dollar versus the Asian currencies towards the end of the quarter resulted in a foreign exchange revaluation loss when our working capital assets in Asia were converted to US dollars for reporting purposes.

But because foreign exchange revaluation losses are considered unrealized losses and they are not cash expenses they are not tax deductible. So it bumps up our effective tax rate. Next quarter our tax accrual is likely to be in the range of 28% to 31%. This assumes constant currency, and it also assumes that we don't experience an unfavorable outcome in the ongoing review by the Indian tax authorities of transfer pricing for one of the tax years.

Getting down to net earnings, our net income for the third quarter was $1.4 million or $0.06 per diluted share compared to $800,000 or $0.03 per diluted share in the second quarter. Now, I will move on to our cash flows and balance sheet.

Our earnings before depreciation, interest, taxes and allowances or EBITDA increased to $2.6 million this quarter compared to $1.7 million in the third quarter, an increase of 58%. As a result of growth in revenues and corresponding growth in accounts receivables we deployed cash in operations of $400,000 this quarter compared to cash generated from operations of $150,000 in the previous quarter.

Looking at our liquidity position, we ended the quarter with $24 million in cash, cash equivalents and investments in term deposits with banks compared to $27 million at the end of last quarter. This decrease was in line with expectations as we undertook share purchases of $450,000 under our previously announced buyback program, incurred $1.6 million in capital expenditures, and funded the increase in accounts receivables of $3 million.

In addition to cash and bank balances and investments of $24 million, our liquidity sources include an unutilized line of credit amounting to $7 million. Considering our existing cash balances, together with our operating cash flows and funds available under our credit lines, we are comfortable that our liquidity position is sufficient to fund our capital requirements for the next 12 months.

Now for our capital expenditures. Last quarter we shared with you that we are budgeting a total spend of approximately $4 million to $4.5 million for the second half of 2011. We incurred capital expenditures of approximately $1.6 million in the third quarter compared to $700,000 in the second quarter. Capital expenditures in the current fourth quarter -- sorry, in the current quarter, third quarter include $600,000 for assets that will be utilized by our IADS business and $700,000 to expand our delivery centers in Asia for both IADS and our core business.

In Q4 we are expecting to spend the remaining budget of approximately $2.5 million. We expect to incur another $3 million of CapEx in Q1 of next year. So just to make this clear, approximately 60% of this cumulative $7.5 million of CapEx is to expand our facilities to accommodate anticipated growth. In rough terms, this will enable us to accommodate approximately $50 million of new incremental annual revenues.

I will now review our working capital. We ended the quarter with accounts receivable of $12.6 million compared to $9.6 million at the end of last quarter. We maintained our revenue collection efficiency as measured by days sales outstanding or DSO at 54 days in both the quarters. As discussed earlier, the increase in the accounts receivables of $3 million is primarily due to this quarter's 18% revenue increase and the lag time to collect billed revenues within our normal credit terms.

Working capital at the end of the quarter was $26 million compared to $25.4 million at the end of last quarter. The increase resulted primarily from a $3 million increase in our accounts receivables offset by a $2.7 million reduction in cash, cash equivalents and short-term investments.

I will now conclude with some comments on our share buyback program, our remaining tax NOLs and efforts at managing foreign currency risk. First, the share buyback program. This quarter we repurchased 152,000 shares of our common stock at an average weighted price of $2.95 per share for a total cost of $450,000. These repurchases basically used up what was left in our June 2010 buyback plan under which we repurchased a total of 758,000 shares since July 2010 for a total cost of about $2.1 million.

In September 2011, the Board approved another plan for repurchase of our common stock for a total amount of $2 million. The second item is tax NOLs. As a result of earnings for the current quarter, we used $1.7 million of our federal tax NOLs. This reduced our US federal tax NOLs from $10.5 million in the previous quarter to $8.8 million in the current quarter. These NOLs will continue to give us cash tax shield until they are exhausted.

Finally, I just want to say a word about our foreign exchange hedging program. As of the end of Q3, we had foreign currency forward contracts worth approximately $44 million taken to mitigate foreign currency risks associated with our operating expenses in Asia.

As a result of September's sudden surge in the value of US dollar, we incurred unrealized losses of $1.3 million on these forward contracts as of September 30, 2011. As these are qualified hedging contracts, we recognize gains or losses in our income statement as of when the contracts mature. I will now open the line for questions.

(Operator Instructions)

And we will take our first question from the site of Tim Clarkson. Please go ahead, your line is open.

Okay. Hi, Jack, hi, O'Neil, good to hear from you, good results.

Hi, Tim.

Hi. Just wanted to have you guys maybe put a little bit more color. When I was out there a few weeks ago the one thing that impressed me was really there's been a big change in the sales organization, and maybe it isn't as sexy as some of the high tech stuff, but maybe talk about the background of your new sales manager, this new discipline on margins. You've swapped out some weaker salesmen, added some stronger salesmen, and you've actually increased your sales staff, too. So a lot of important elements that are going to contribute more consistency I think to the results.

Sure, Tim ,be happy to. You know, Jim's been now in his position now for a good several months, and he's come up to speed very, very quickly and he -- and part of that's because he brings with him an extensive background in content and content technologies. And part of it's because he's a real smart guy who comes up to speed quickly. So we're very pleased with some of the changes that have taken place.

As you mentioned, one of the important changes is we've brought in a lot of new staff. The group has organized itself extensively, some new processes in place and all of that seems to be really gelling and taking hold. We see increasingly the ability of that team to do very, very good work for customers and to be very consultative, very diagnostic. That's all good stuff in our business.

At the same time, O'Neil and his team have done a great job at instilling in the sales force and in others in our Company the need to carefully manage and monitor the business model and to understand the kind of discipline we need regarding pricing. So I think the teamwork there has come together very well.

Right. Now, O'Neil, now did we -- were there any actual realized losses on currency in the third quarter?

Hi, Tim. No, not in the third quarter. We did not have any hedging, foreign exchange hedging losses in the third quarter.

Do you expect any in the fourth quarter or is it too soon to know?

No, we don't expect anything in the fourth quarter either.

Okay. Great. I'm done, thanks.

Thank you, Tim.

We will go next to the site of Charlie Pine. Please go ahead.

Hello, Jack, congratulations on an excellent quarter.

Hi, Charlie, thank you.

I'd just like to focus a couple of questions on your comments in the eBook space. You're characterizing it still in your words as somewhat of a -- a bit of a Wild West, and it also sounds like you're sort of prepping just a little bit to anticipate maybe some lumpiness going forward in eBook revenues.

I'm curious as to why you anticipate sort of lumpiness in that space since there seems to be just a tremendous proliferation of devices that we're seeing from the names we all know and which is driving -- which one would think would be just driving massive amounts of new content.

So the first part of it, well, I'd like to ask two questions about it, but the first part is why you're looking at more of -- it seems to be you're sort of anticipating more lumpiness rather than a sort of hockey stick approach, and I wonder if you could discuss that a little bit?

Sure, it's a great question and thank you for asking it. My comments in terms of the eBook business are more to contrast it with what we're trying to do strategically in IADS. In IADS we see instantiating ourselves in the workflow of companies where we can help them manage risk or help them make certain business processes much more efficient. And we're anticipating that kind of business once we close it it's known. It has a history that is [apprehendable] and you can plan and forecast it pretty easily.

The eBook business by contrast is certainly as exciting in many, many respects but it's new. It's coming on. It's emerging. I expect that it's going to change radically several times over the next few years. We've got a great position in that. We're delivering eBook content to 25 different eBook platforms and publishers or bookstores now.

We're the major supplier to five of the six big eBook stores for several of those providers where they're sole pipe for content that's getting converted and then going into the store so it's all very good. But you don't have the same kind of history behind it to be able to project the future. I can imagine scenarios where it only does increase for the next several years, but I can also -- I don't have the history to make that projection. On the IADS side I think there'll be a level of predictability that will provide a neutralizing effect for the unpredictability that we may experience in other areas.

As a bit of a follow-up, what, if any, kind of competition are you seeing in the eBook services spaces recently now?

Great question. There certainly are competitors. That said, we think we've got a considerable competitive advantage. We've developed a reputation, well, our customers tell us that we scale better and that our quality is considerably superior. That has enabled us, as I said, to form partnerships that are close collaborations with several companies that I've dreamed about working with. So it's we're in a very good space, very well-positioned.

I think in the future the eBooks that we're producing today will seem like dinosaurs. So we're very much focused on what is the future of the eBook? How will interaction be supported in eBooks? How will we incorporate rich media in eBooks? What -- how -- will eBooks be sold in the future? And we're doing a lot of work in those areas.

So we intend to maintain our competitive advantages that are the result of decisions we made a couple years ago to invest in technology around this. And we intend to very carefully cultivate the relationships that we've formed with some of the people who we've talked about in the recent past.

Last thing on this topic, any clue as to when you think we might be seeing some more of these more interactive or richer media-type of eBook offerings --

Yes, we're --

-- that might be able to give you -- that might be able to give you a boost to some of your margins in the space?

Sure. We're actively working on them now. We're working with several publishers, some household name publishers and then also some very new entrants into the space to take advantage of some of the new standards that will be emerging in ePub that will support some of the enhancement. And then also on building iPad apps and building content that's much more interactive.

And as you say, it is margin enhancing. Some of the work we're doing there is very well-received by clients. We've figured out some of the technology challenges associated with aspects of this and very much looking forward to those kinds of engagements at scale.

The last thing I would ask about would be in your legacy work that you've done with Amazon, do you continue to believe that that would -- excuse me. Do you believe that that will probably continue with the new Kindle Fire platform or do you think that there could be some alterations or some net benefits to you because of the release of the Kindle Fire?

Yes. I think that tablet releases and ongoing anticipated and then actual advances in the technology will all accrue to our benefit. And I'm speaking, when I say that it applies equally to Amazon's releases as it does to the Apple technologies as it does to other technologies that we support, including Android platforms and others. So I think it all accrues well to our benefit.

And fundamentally I think that what we're seeing is that digital publishing on portable devices is a macro trend that we've only just begun to experience and again, it's our intention to stay very current with those developments and to be in a position to support the kinds of user experiences and digital experiences that people will expect those platforms to provide.

Well, once again, congratulations on a great quarter and I'm really excited about the business, and I look forward to the future.

Thank you, Charlie.

(Operator Instructions)

We will go next to the site of Perry Highland. Please go ahead.

Hello, guys. Congratulations on a good quarter, and it looks like now consistency coming in. The $5 million that you're going to spend on capital improvements or expansion for the next two quarters that's for the IADS side mostly?

Perry, we're looking at the business across the board, both in terms of content services and IADS. We're looking at our pipeline. We're looking at where we think the business can go. And the expansion that we're planning is to accommodate all of our expansion requirements. We're very excited about our prospects right now, so we think it's appropriate at this time, given there is a little lead time required for building out capacity, we view this as the right time to be doing that for the entirety of the business.

And are you at capacity now? Is that why you're adding like up to a potential of $50 million in capacity or do you still have room?

No, we still have capacity in the existing -- within the existing infrastructure. Maybe O'Neil can give a little color on how much. I'd say off the top of my head probably about $4 million of additional per quarter. We're looking beyond that.

That's high.

O'Neil, is that a good number?

That's about right, yes.

Okay.

Thank you.

(Operator Instructions)

And we will go now to the site of Jay Harris. Please go ahead.

Good morning, gentlemen.

Good morning, Jay.

On the increase in expenses due to IADS, should we assume all of that was in the cost of goods sold?

No, part of that is also in SG&A. O'Neil, if you want to --

Yes.

-- break out --

Hi, Jay. The breakdown is $300,000 under cost of goods sold and $500,000 is under SG&A.

And are any of the expenses in either direct operating expenses or SG&A for the quarter non-repetitive? I'm not talking about sales commissions if sales go down. I'm talking about things that are temporarily charged.

And specifically you're referring to the IADS portion of direct costs in SG&A?

If that's the only focal point, yes.

Okay. It's the answer is yes. There are aspects of the expenses which would be non-repetitive.

And --

So for example, we've got work being done on building some platforms in technologies that we're expensing, but those engagements don't go on forever. And then on the direct cost side there are costs which right now are incurred that don't have offsetting revenue that we would expect to have offsetting revenue.

But the level of expenses would stay the same as we get into next year?

They might change out a little bit, but I think the important thing, and I'll turn this over to O'Neil in a second, is we'll be dialing that proportionally to focus on and to sync up with both pipeline development and client requirements. O'Neil?

Jay, just to add a little bit more color to what Jack said, firstly we are very, very excited about the IADS business and its prospects. In terms of the expense structure, like Jack said, yes, the costs are being incurred to obviously prospect for the business and help grow the business. So the bulk of the costs that you will see would be there and obviously once our revenue starts growing then it will realign itself to a certain percentage of the revenues.

In terms of the investments we are making to build the workflows and the applications, those get capitalized. Like Jack said at the outset, when we already started with the call, approximately $800,000 of these are expensed for the quarter with a breakdown of $300,000 under COGS and $500,000 under SG&A. And the cumulative CapEx spend under IADS is about $950,000.

Well, the reason I'm asking the question is that on the -- I don't have the third quarter in front of me but you sort of indicated that you're -- I mean the second quarter in front of me -- but you indicated you had a $3 million revenue increase consecutively. What was your gross profit increase consecutively?

Our gross profit expanded about 300 basis points from 30% to 33%, so this increase is after absorbing the expenses that we are incurring on IADS.

To do the calculation [you mean].

Into the calculations, absolutely. And to clarify a little bit more, the SG&A expenses was 24% of revenues this quarter compared to 25% last quarter. This is again after absorbing the $0.5 million of additional spend on IADS. So if you were to take a step back, we are improving our performance after investing within our business model to create future business while delivering improved results.

Do you have the numbers in front of you? In other words, on the 300 -- on the $3 million of incremental revenues on a sequential quarterly basis, what was the incremental gross profit?

The gross profit, like I clarified, expanded from 30% --

(inaudible - multiple speakers) of dollars.

In terms of dollars?

Yes, please.

The gross profit increase was $1.5 million or 31%.

And that was after absorbing an additional, what, $300,000 in direct operating expenses from IADS?

That is correct.

That's a very high gross margin on incremental revenues. Is that what we should anticipate going forward and if not, what would be the appropriate range?

Good question again, Jay. I think we -- there are two things. I mean if you -- if you remember what Jack said when he gave -- he presented the results, there are two things we are doing with the new businesses that we are booking, on an average we are getting 12 to 14 percentage points higher in margins. And that is a direct labor margin level.

[As I said] there are two things. One is just instilling a very high level of discipline and rigor in our sales and pricing process, and secondly, having a very, very high level of automation and leveraging the technologies that we have.

So that incremental margin, direct labor margin flows through to leverage the fixed expenses that we have at the cost of goods level. And what I mean by that is there is a certain level of expenses that we incur in running our centers which is fixed in nature.

So the gross margins expand because of two reasons. One is the direct increase in the direct labor margins and the second is because of the leveraging impact we have on the fixed element of the cost of goods sold. Is that clear or have I --

No. Let me give you more focus. If on a sequential quarterly basis your gross profits on incremental revenues were 60%, should we expect something like that going forward? Or is it going to be significantly less?

We expect it to be in the same range, and long term our target is to get to a 36% to 38% in terms of gross margins.

Well, you could do that with a $3 million increase in revenues. On a consecutive quarterly basis you'll be there.

Yes. That is our goal and that's exactly what we're trying to reach --

No, but --

-- 36% to 38% in gross margins. Whether we get to it in the next quarter or the quarter after that I can't say at this stage, but --

Well, $70 million this year and next year do $84 million, which would be a 20% increase and you bring 50% or 60% of that $14 million to gross profits, that's you're well above that 38%. That's why I asked the question.

Yes, that would not be the right way to look at it because what will happen is as we create additional capacity to grow, part of the -- the fixed part of the expenses under cost of goods sold will increase. So it is everything that we bring in terms of incremental revenue will not flow down directly to the gross margin and to the bottom line. There will be some expenses that we will incur in anticipation to earn those revenues, which will be fixed in nature. Does that make sense? Jay, I think if you have further questions on this I'll be happy to do it offline and clarify.

This does conclude our questions. We will now turn the call back to Mr. Jack Abuhoff.

Okay. Operator, are you sure there are no more questions in the queue?

Yes, sir, there are no more questions in the queue.

All right, thank you. Well, thank you everybody. To just recap a bit, revenue, gross margin, net margin, all up sequentially and year-over-year. Bookings for the first nine months of the year were more than 50% higher than our bookings during the same nine-month period last year. And next quarter we're expecting revenues to be $20 million or more.

We're seeing increases in our eBook business, which clearly are validating investments we've made over the past couple years in processes and technologies enabling us to really set the quality standard in eBook production and build client relationships with some of the world's most influential brands who will be shaping this market for years to come.

We continue to progress well on other elements of our 2011 three-year strategy as well. As O'Neil just reiterated, new business we're booking this year is at margins which are 12% to 14% over 2010 levels. We're accomplishing this by selling more strategic services, staying very margin-focused and automating processes.

We're investing in our IADS segment to bring our capabilities to some new markets with both Synodex on the digital medical records side and docGenix on the legal side. And we're anticipating this division to begin contributing to revenue in the first half of 2012.

And we're building significant additional capacity to accommodate and anticipate an increased level of demand for our services. Our goal, which we established at the beginning of this year is to become a $100 million Company over the next three years, to become a truly globally respected and known business services company and, of course, to create significant value for our shareholders along the way. So thank you everybody for joining us today, and we will look forward to being with you next time.

This concludes today's conference. And today's conference is available for replay by dialing 888-203-1112 or 719-457-0820 and entering pass code 9840082. Again, the numbers are 888-203-1112 or 719-457-0820, pass code 9840082. Thank you for your participation. You may now disconnect.