Innodata Inc (INOD) 2012 Q1 法說會逐字稿

Good morning and welcome to the Innodata Isogen first quarter 2012 earnings call. Today's conference is being recorded. At this time I would like to turn the conference over to Ms. Amy Agress. Please go ahead.

Thanks, Zach. Good morning everyone. Thanks for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata, and O'Neil Nalavadi, our CFO. We will 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 based largely on our current expectations and are subject to a number of risks and uncertainties including without limitation that our Innodata Advanced Data Solutions segment is subject to the risks and uncertainties of early-stage companies; the primarily at will nature of the Company's contracts with it content services segment customers and the ability of the customers to reduce, delay or cancel projects; continuing content services; segment revenue concentration and the limited number of customers; continuing content services segment 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 which comprise requirements for digital content and professional services and knowledge processing; difficulty in integrating and deriving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies that we acquire; changes in our business or growth strategies; the emergence of new or growing competitors; various other competitive and technological factors and other risk and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission. Actual results may differ significantly.

Thank you. I will now turn the call over to Jack Abuhoff.

Thank you, Amy. Good morning, everyone. Thank you for joining us this morning. I will review our first-quarter 2012 results and share with you some of our 2012 strategic priorities.

Revenue in the first quarter was a record $25.1 million which was a sequential increase of 6% over fourth quarter 2011. Our gross margins held at 36% and our pretax earnings increased from $2.2 million in the fourth quarter to $3.7 million in the fourth. So by all measures a good quarter.

2012 promises to be an exciting year. We see ourselves as very much participating in the digital revolution and we are motivated to help a wide variety of companies harness the power of digital data within their businesses.

The appetite for consuming and analyzing through digital data is just emerging and I believe that we are proving that today's Innodata and tomorrow's Innodata can play a profound role in this transformation. As this is the first quarter of the year, I will indulge in a bit of table setting.

Let's first take consumer content. eBooks and content delivered over Kindles, iPads, iPhones and other dedicated eReaders. Multifunctional tablets and smartphone have become part of most of our lives. Sales of eBooks soared in 2011 and experts predict significant continued growth over the next several years.

But we are only at the very beginning of this transformation and we have only seen a glimpse of what the future holds in store. Today we may read a New York Times bestseller on an iPad but for the most part what we are reading is little more than a portable version made to look a lot like a printed book. But tomorrow's eBook which we are privileged to be working on will bring immersive multimedia experiences and a high level of interactivity and reader engagement that will enable knowledge sharing, search and discoverability that it is hard to even imagine today.

Now let's take business information. Business information publishers, folks like Thomson Reuters, Wolters Kluwer, Reed Elsevier, Bloomberg, these are the companies who provide authoritative information in science, law, business and news and constitute in fact our largest market segment. Not ones to be left behind, they are inventing entirely new digital products and retooling their operations in order to take advantage of new technologies and to stay relevant in a world shaped by mobile devices and social media.

Last, let's take businesses outside the publishing and information industry, businesses in healthcare, finance and insurance for example. They have a growing (inaudible) of data much of which is quasi-digital in the form of images but not yet true searchable digital data.

McKenzie recently concluded that each of these sectors has more data stored per company than the US Library of Congress. Helping these companies transform data to true digital data and capturing its value in business is an enormous opportunity. The core of our 2012 strategy is geared around engaging with each of these three markets to enable them to better seize the power of true digital content in their products and their operations.

So let's take each of these in order starting with eBooks. In the first quarter, eBook services accounted for 47% of the revenue in our content services segment. We have some significant advantages in eBook services. We invested early in building the technologies necessary to perform eBook services economically and at unrivaled quality levels and we have seen a significant return on this investment.

Today, we perform eBook services for leading eBook retailers, platform providers and publishers. In 2011, most of our year-over-year growth resulted from high demand for our eBook services particularly from a major new customer. The eBook business while certainly dynamic affords less revenue visibility than the non-eBook portion of the content services segment and there are several reasons for this.

On one side of the equation, we are seeing the platforms establish their budgets around dynamic strategic priorities. On the other side, we are seeing publishers struggle with the time it takes to clear digital rights, to locate original master files used in print production, and to make decisions about pricing. At a more micro level still, battles are being waged around the so-called agency model where publishers set the prices on their content versus the so-called wholesale model where platforms like Amazon set the price.

This quarter, we substantially exceeded our forecast due to higher than anticipated demand from a key customer and a large pilot engagement. To continue to make the most of our position in this market in 2012, we will be extending our capabilities to serve our key clients in international markets and in the production of highly interactive multi-touch eBooks.

We will also be launching new eBook distribution services for publishers. We will also be continuing to evolve our underlying conversion technology to make it progressively easier to scale up and down to seize opportunities without compromising margins.

Now I will turn to the non-eBooks portion of our content services segment. In the quarter, we produced approximately $14 million of revenues in non-eBook related business. This has essentially run flat through 2011 and now into Q1. In order to grow this portion of the business in 2012, we began making several changes to our go to market strategy and our operation strategy.

We will be deemphasizing task-based services like digitization and content enhancement in favor of transformational services that will help our customers with critical business issues that they face in shifting from print to digital and publishing over (technical difficulty) for new platforms like the iPad.

We began formalizing these transformational services in 2011 into highly defined productized solutions and now we have several highly successful referenceable engagements under our belts. For example, we helped the world's largest publisher create its first ever multi-platform delivery system to send content to the Web, print and iPad simultaneously. For another leading publisher, we helped create entirely new product from a print legacy product.

In each of these engagements, we integrate our core services of digitization, content enhancement, systems, and applications development and consulting but with a unified focus and within a defined framework set of tools that enable product or operations transformation.

In the first quarter, our marketing team began messaging around these capabilities and generating interest. So far the results have been encouraging. I will look forward to sharing with you our successes in this regard as we proceed through 2012.

I will now turn to our digital enterprise strategy which is embodied in our IADS business segment. We formed IADS, short for Innodata Advanced Data Solutions, in 2011. The idea behind it was that we could mobilize our capabilities in digitizing, content analysis, and content management to help companies in other sectors make better use of true digital data within their businesses.

To date we have invested approximately $4.3 million of operating costs and another $2.7 million of capital costs in our IADS business in essence investing part of the cash flow we were making from our content services segment. We use this investment to develop new high potential offerings in the areas of healthcare information and complex financial information.

We saw these business lines as having a couple of things in common with our eBook services as well as a couple of notable differences. Like our eBook services, we saw the potential for meeting our profitability objectives and opportunities to create highly repeatable standardized offerings. In contrast with our eBook services business, we saw the opportunity to create substantially better revenue predictability with lesser revenue concentration.

I am very enthusiastic about these new business lines. I am pleased to report that in the first quarter we had $600,000 of revenue from one of our new IADS business lines performing what was essentially a proof of concept for one of the largest banks on Wall Street.

I'm also pleased to report that we have developed a pipeline of interested prospective customers. I believe that IADS will contribute importantly over the next several years to growth, to earnings and to revenue visibility as well.

In 2012, we will have a couple of other strategic objectives that I would like to also share with you. First, much the way that we did in 2011, we will be focusing our engineering efforts on increasing process automation, focused both on our existing portfolio of engagements as well as processes that are implicated by the kinds of engagements we are selling today.

We will also be continuing efforts we began in 2011 to cultivate a more unified company culture. As you may recall in 2011, we began simplifying our branding preferring to present ourselves and our corporate imagery simply as Innodata as opposed to Innodata Isogen. In this year's proxy, we will be asking for your support to officially change our name from Innodata Isogen to Innodata. Assuming we obtain shareholder consent, we will be doing business officially has Innodata starting in June of this year.

Through the year, we will be engaging in other initiatives to further our entrepreneurism and our ability to innovate. I look forward to sharing some of these as we progress through the year.

We are optimistic about our prospects for 2012. In the first quarter, we substantially exceeded our revenue forecast of $21 million as a result of stronger than forecasted demand from a key client for eBook services and as a result of our pilot program with a large bank. Based on current visibility, we anticipate revenue in the second quarter of 2012 is again likely to exceed $21 million but not to the extent of first quarter. We will be targeting overall growth in revenue and earnings for the year.

A couple of cautionary points that I have mentioned in our last couple of calls and I will again reiterate here today. In the past, Innodata has had periods of revenue growth followed by periods of revenue decline as large projects waxed and waned and we sought to reduce the concentration of our revenues in a small number of customers.

Concentration increased further in 2011 with the ramp up of our eBook services. We believe that our IADS strategy and its expansion is the right strategy to even out these swings and ultimately reduce the concentration of our revenues. Until this strategy proves out however, we remain susceptible to these kinds of fluctuations.

I will now turn the call over to O'Neil who will provide additional insight into our Q1 financial results. After that we will take your questions and then I will wrap up with some final comments. O'Neil?

Thank you, Jack. Good morning, everyone. Thank you once again for joining us today to review our financial results for the first quarter 2012.

We had another great quarter with revenues surpassing $25 million and net earnings of $3.4 million or 14% of revenues. This strong performance in the first quarter is the result of solid growth in bookings at targeted margins in FY 2011, higher than anticipated volumes at eBook services, and the positive impact of operating leverage.

I will review with you the details in our financial statements and compare the performance in the first quarter of 2012 to our performance in the fourth quarter of 2011. I will then spend a few minutes discussing our capital expenditures, working capital, and foreign exchange hedging program.

Starting third quarter of 2011, we reported numbers separately for our two segments, Content Services and our newly formed Innodata Advanced Data Solutions business which we also refer to as IADS. Starting this quarter, we will report the numbers after elimination of any [internal] segment profits.

Our total revenues were $25.1 million in Q1 compared to $23.7 million in Q4 2011, a sequential increase of 6%. Approximately $600,000 of this increase of $1.4 million is attributable to an initial test engagement for a major global bank in our Advanced Data Solutions business and the remainder was in content services primarily attributable to an increase in demand for our eBook services from a key client which was partially offset by lower revenues from other clients. Our top three clients contributed 56% of revenues in both the quarters.

Our eBook services accounted for 47% of total revenues in the first quarter of which a significant portion of the revenues from a key customer. The soaring consumer appetite for eBooks has enabled us to build strong business partnerships with leading platform providers who value our capabilities.

But the underlying revenue is dependent on numerous factors not within our control which makes forecasting difficult. For these reasons we are focused on building our IADS business which we expect will produce predictable and high-quality revenues.

Our gross margins expanded in line with revenues by 7% this quarter. It increased to $16 million, up from $15 million in the fourth quarter of 2011.

As a percentage of revenues, our gross margin was consistent at 36% in both quarters. This current quarter amount includes $1 million of costs incurred for creating production capacity for our Advanced Data Solutions business net of revenues of $600,000. Excluding these costs, the gross margin in our existing content services business increased to 41% in Q1, up from 37% in Q4 2011.

Looking out over of the year, we expect wages in our delivery centers in Asia to grow by $400,000 per quarter from Q2 2012 to year-end.

Our SG&A expenses were about $5.4 million in the current quarter compared to $6.3 million in the previous quarter, a decrease of $900,000. SG&A expenses as a percentage of revenues was 21% this quarter compared to 27% in Q4 2011. The reduction in expense was in accordance with our plan as last quarter's SG&A expenses included an amount of about $700,000 for variable performance-based incentives and $300,000 for nonrecurring professional fees to build the data security infrastructure for our Advanced Data Solutions business.

Total SG&A expenses in the Advanced Data Solutions segment was $500,000 in the first quarter compared to $1 million in Q4 2011. Last quarter's expense in IADS included $200,000 for performance-based incentives.

Moving down to pretax earnings, our pretax earnings in Q1 benefited handsomely from operating leverage. A 7% growth in revenues produced a 65% increase in our pretax earnings rising to $3.7 million or 15% of revenues from $2.2 million or 9% of revenues in Q4. This was primarily due to a $600,000 increase in gross margins and a $900,000 decrease in SG&A expenses.

These pretax earnings are after absorbing start-up costs of $1.5 million for our Advanced Data Solutions business. Excluding these investments, pretax earnings were 21% of revenues for our content services business in Q1 up from 15% in Q4.

In the current quarter, our tax expense was $900,000 or 24% of pretax earnings versus 13% or $300,000 in Q4 2011. As discussed in our last earnings call, our tax expense in Q4 was lower because of the year-end adjustments. For the current level of profitability based on constant currency we expect our tax rate to be in the range of 21% to 25%.

Getting down to net earnings, our net income for the first quarter was $3.4 million or $0.13 per diluted share compared to $2.3 million or $0.09 per diluted share in the fourth quarter.

I will now turn to our cash flows and balance sheet. Our earnings before interest, taxes, depreciation and allowances or EBITDA, increased to $4.6 million this quarter compared to $3 million in the fourth quarter, an increase of 50%. Last quarter one of our key customers had delayed payments to us because of a procedural issue which was successfully resolve this quarter. As a result of an increase in collections and increase in EBITDA, cash generated from operations increased by about $12 million to about $8 million this quarter compared to cash deployed in operations of $4 million in the previous quarter.

Looking at our liquidity position, he ended the quarter with $23 million in cash, cash equivalents and investments and term deposits with banks compared to $17 million at the end of Q4 2011. In addition to cash and bank balances and investments of $23 million, our liquidity sources include an unutilized line of credit. We are in advanced stages to increase our line of credit to $15 million from $7 million in the last quarter.

Now for our capital expenditures. We incurred capital expenditures of approximately $2.1 million in the first quarter compared to $3 million in the fourth of 2011. The capital expenditures in Q1 primarily include $600,000 for assets that will be utilized by our Advanced Data Solutions business, $1 million to expand our delivery centers in Asia for both our businesses, and $500,000 for routine CapEx.

In Q2 2012, we are expecting to spend between $2.5 million to $3 million in CapEx which includes the balance amounts needed to complete the buildout of 50,000 square feet of office space we have leased in Q4 primarily in anticipation of our future IADS businesses.

I will now review our working capital. We ended the quarter with accounts receivable of $19 million compared to $21.7 million at the end of Q4 2011, a decrease of approximately $2.6 million. Our DSO, or days sales outstanding, increased by eight days to 74 days in Q1 primarily on account of a larger percentage of revenues from some key clients who tend to take a longer time to pay than they expected due to internal administrative procedures.

I will now conclude with a few comments on our hedging programs for managing foreign exchange risk. At the end of Q4, we had outstanding foreign currency contracts worth approximately $29 million as a hedge against foreign currency risk associated with our operating expenses in Asia. As a result of the increase in the value of US dollar compared to our forward contracted rates, we had notional unrealized losses of $700,000 on these forward contracts as of March 31, 2012.

But on the positive side, any losses are compensated by higher margins when the dollar appreciates in value versus [station] currencies. As these are qualified hedging contracts, we recognized gains or losses in our income statements as and when the contracts mature.

I will now open the line for questions.

(Operator Instructions). Joe Furst, Furst Associates.

Good morning, gentlemen. Congratulations on a very good quarter. Just two quick questions. One, on the income statement you have this line that says loss attributable to noncontrolling interests which in this case is a gain. Can you explain exactly what that is?

Good morning. Yes, the losses relating to the minority interest of the IADS business as we have discussed previously, the Innodata's interest in the Advanced Data Solutions business is approximately 77%. So to the extent that the IADS had losses, a portion that relates to the minority interest is shown on the income statement.

Got you. Okay. And a second question was you talked about getting $600,000 of revenue from the IADS segment on basically a pilot program. And my question would be how is that pilot program going? Is it proving that it works or what is the status of that?

Yes, it is going very well. I think we are ultimately able to show (technical difficulty) institutions and others like it that by being able to manipulate digital data in a different way than they have been able to in the past and to be able to capture information from sources of quasi-digital data like images. And to utilize that data in their businesses, they can reduce risk and they can better manage portfolio. So we are very encouraged by the work that is being done there.

How long do you think it will take before you can determine whether this will be an ongoing program or a source of new business?

It is hard to say. I am confident in that it will. And as I said, we are seeing a significantly developing pipeline for IADS business generally. What we lack at this point is historical data to help us predict a sales cycle. So that makes it very hard to put a number on the quarter or even a number on the year for IADS. But based upon the interest we are getting and the amount of business that is pipelining and then further being able to factor that by some referenceable engagements where we are making a real difference for companies, we think there is a significant opportunity there for us.

Okay, I was talking about this one specific program, this pilot program that you were talking about. I assume this is -- does this really work and if it does work, then they would follow on with a contract I would think. That is the specific one I was talking about.

Sure, Joe. I appreciate that. I think it is our policy to always talk at a little bit higher level than any single client engagement for a combination of competitive reasons but also being sensitive to individual client preferences. So again, everything I said about the environment and the opportunity generally is also consistent with the opportunity we see within the client based on the pilot.

Okay, I will get back in the queue to ask a question later.

Thank you.

Charlie Pine, Van Clemens.

I would like to follow up just a little bit on some of the activity in the IADS segment. The additional reference opportunities that you referred to in the pipeline, is it docGenix or does that have to do with the other segment, [Synadex]?

I noticed you didn't really reference anything specifically regarding the Synadex area so I guess I would like to get a little bit more color on that. And then I have a follow-up.

Sure, sure, good. We are seeing opportunities on the Synadex side as well. And if you take a step back from Synadex which is geared to digital healthcare information and docGenix which is more focused on financial services information and using the power of digital data in the context it is helping financial services firms manage risk, both of these are very similar plays in essence.

From a pipeline perspective, we are seeing significant opportunity in Synadex as well and we are very excited by that. We also have pilot programs that are going on there and early reports from those pilot programs are equally encouraging.

Regarding those pilot programs, are you getting any sort of reference dollars from them or are they still very much to the point where you are not getting -- you are not billing any numbers from those yet?

That is correct. The pilots that we are doing right now for the most part are not paid pilots.

And then my follow-up is, you also announced this morning an intent to file a $70 million shelf. What do you need $70 million for?

Yes, the SEC rules severely limit what we can say about our intended shelf registration until we actually file it. Pretty much all we can say is already in the brief press release that we issued today and we will be happy to read it aloud on this call if you would like us to but until we file, there is very little that we can say.

Do you have any timeframe as far as when you anticipate actually filing it?

We expect to do it within the next one month or so.

Okay, thank you.

Tim Clarkson, Van Clemens.

Just getting back to the shelf offering without getting into the specifics of it, Jack, obviously if you sell stock and there is dilution, that is a negative. What is the potential upside of -- you know, you've got a company with $25 million or $23 million in cash, what would be kind of the logic of needing more cash? I assume there is some opportunities there that would open up that would more than justify the additional dilution?

Sure, I guess again mindful of the rules that are imposed upon us by SEC, we can't talk in detail about the shelf for reasons that O'Neil just said. But what we can do is kind of take a step back from the shelf and talk about how we view opportunity and how we view the importance of being ready to act opportunistically and strategically to make the most of where we are.

We are doing several things that I think are very important and that could be very influential and very remunerative to our shareholders. The notion that -- the role that we have got in the world of eBooks is I think enviable. We have worked hard to earn the trust of several very large players in that world who are going to be very influential in helping create what it is tomorrow. We see significant opportunities there to continue to be helpful.

We just talked a little bit about in answer to Charlie's question about IADS, we see some very significant opportunities there. What we lack is the ability to very accurately predict timing on things. That said, what we are wanting to ensure is that we have adequate access to capital and access to resources in order to mobilize resources to make the most through the opportunities that come our way.

We are very mindful that we are accumulating cash. We are doing that very intentionally in order to be able to fund opportunities, in order to be able to show a strong balance sheet which is very important to some of the new kinds of clients that we are prospecting for.

We are also looking into other kinds of financing which we would probably tap significantly prior to looking to do anything that would dilute equity. That said, we do believe that there is a best practice relative to being resource enabled, and we believe that it is important for us to try to emulate that best practice.

Right. I assume when you're talking about in the context of Innodata, it is a $100 million company with $23 million in cash if you are talking about raising potentially $30 million, $50 million more dollars or $70 million more dollars, there is obviously on the other end pretty large revenue opportunities that would justify needing that kind of capital.

That is right. We are seeing some very significant revenue opportunities and we want to be poised to be able to react very quickly and with a great level of commitment to those opportunities as they emerge.

Right. I assume that you are not looking at typically at acquisitions, I know you have always been careful about acquisitions.

Yes, we have been careful and there is a long list of things that we passed on even recently. But we are continuing to look and we do even today have a list of things that we are interested in that could be additive to and supportive of our strategy in the different areas that I mentioned and we are going to continue to look at those.

Okay, great. Thanks.

Vincent Colicchio.

Good morning. Nice quarter. A few questions for me here. Was the significant eBook client this quarter the same as the previous quarter?

Yes, we have got a couple of significant clients. I think the answer to that is yes, I would have to go back and see exactly what you are referencing from the past but I think the answer is yes.

My question refers to -- was the client that was a key growth driver on the eBook side the same as the client that was the key growth driver last quarter?

Yes -- the answer.

Okay. Then in your prepared remarks, it sounds like you've got an improving pipeline for content services with other clients outside of your top two or three clients. Is that correct?

Yes, it is.

Okay. Back to your IADS business, the $600,000, that was a pilot. So how did that fee relate to the pilot? Is that a fee that you can get on other pilots? How does that work?

Again, we don't have a lot of history to rely upon because we are talking about new businesses but what we do see is -- and if you think about this, we have got big banks and big, big companies that in various ways touch healthcare. And the notion that in this day and age you can run critical processes on non-digital information is becoming essentially untenable. You can't search, you can't downstream information to risk systems and a host of things.

So there is a lot of opportunity to help these companies rethink that and when you think about the magnitude of the sectors and the magnitude of the large companies that populate those sectors, even a pilot can be a lot of money.

A couple of questions about capacity. So you are adding some capacity in Asia for both of your lines of business. You just mentioned a shelf will be helpful if opportunities came your way. What is your capacity utilization so to speak today for your content services business and how long does it take you to add substantial capacity in terms of timing?

I will start that off and then I'll pass the ball to O'Neil on that one. I think the exact dollar revenue capacity is hard to nail down because it depends on the kind of business we are doing. So as the business shifts the revenue potential of the infrastructure as it exists changes.

That said, when we look at expansion we see that we've got a pretty good formula. We are able to add new facilities very quickly in a matter of months. And what we see is that based on the capital that we have put at our new India-based facility that has roughly the potential to generate about $25 million of annualized revenue. O'Neil, what would you want to add to that?

In terms of the business model just to add a little bit of color to what Jack said, we try to manage our business at between 85% to 90% capacity utilization and we have pretty much got our business model in terms of growth in a modular fashion. Typically it takes somewhere between three to six months for us to get a delivery center up and ready and we are talking in terms of leased premises.

In terms of CapEx, typically for adding incremental revenues somewhere of the order of about $25 million, we will probably need to spend between $2.5 million to $3.5 million on an average. So that is the metrics in terms of utilization and cycle time to get it ready.

And a question about revenue visibility. You have been providing the number of $21 million for the low end of guidance for each sequential quarter. Is that number based on booked business and any kind of excess would be from business that comes in in the short term?

No, the number includes -- well, it is booked business plus in some cases very late stage pipeline where we feel very confident in the late stage pipeline maturing to a booked piece of business within the quarter and that booked piece of business turning into revenue.

Okay. I will go back in the pipeline. Nice quarter, guys.

Thank you.

(Operator Instructions) Jay Harris.

Jack, so far I thought your conference call was very crisp and very informative. Given the fact that you are now going to be reporting on two segments, can you say anything about the level of losses or profitability in the IADS business in the next quarter or for the remainder of the year?

Sure, Jay. Thanks for the question. I think from a modeling perspective, we can expect that the IADS business will be as profitable as other aspects of our business and potentially more profitable. I think strategically the opportunity that the IADS presents is a larger, progressively larger market place and high quality revenue that gives us much, much greater forward visibility. And as we know, that would have great value in terms of our product mix.

In terms of being able to put a number on it and forecast it, we are not going to try to do that for external purposes at this point because these swings could be too dramatic. And again to reiterate what I said before, we are learning what the sales cycle and win rates associated with this business are likely to be and until we have a really good handle on sales cycle, it is virtually impossible to predict what the revenues in any period would be.

Can you say at this point that the losses won't be any greater in the June quarter or could they be greater?

Could they be greater? They are not forecasted to be greater. If we were to begin ramping up for very significant revenue opportunities that are booked, then depending upon the timing of billings versus ramp up you could have greater exposure. So I'm not going to say that they won't be. What I will say is if they are, it is a good thing.

Are there any other -- as you have been changing the focus of the product line, are there any other new businesses that are likely to ramp up either this year or next year which could have a short-term negative impact on the P&L statement?

It is possible, Jay. We see a number of other opportunities that are either similar to the things we are now pursuing in IADS or relate to consumer content by which I am referring more specifically to eBooks and we may be making further investments in those things as well.

Is there a more detailed explanation of what your programs are delivering on the IADS business? From what you have said on this call, I don't understand what that bank and pilot program is receiving nor do I fully understand what the array of programs can deliver to the prospective customers? Do you have some written materials on your website that describes this better?

We would be happy to -- we will send over a couple of things to you when we recently --within the past few months we did a press release or two on docGenix specifically. And I think there we described the benefit that our program can have to a financial services institution. I will look around and see if we have got other things that we could send you to help round out that understanding.

On your more traditional businesses, is the 41% gross margin that you realized in the recent quarter sort of a peak number?

Is it a peak number? I think it is beyond what we would be targeting from a modeling perspective. That said, we are always looking to beat what we are targeting.

Last year you sort of said mid-30s.

And I think from a modeling perspective mid-30s is the way we think about the business right now and the way I'd encourage you to think about it as well.

And Jay, you know, we have kind of discussed this in maybe two or three calls ago and on one of the calls last year. End of this quarter we've benefited handsomely from -- essentially the operating leverage. When revenue grows beyond what we have planned for then we -- a significant percentage of that drops to the bottom line.

So from a modeling perspective, we should be looking at approximately 35% and an EBITDA of 10% is what we are targeting within that (inaudible) even for long-term growth, we should be prepared for the Company to make some decisions on a quarter-to-quarter basis to making investments in production capacity particularly for our IADS business.

When you are -- coming back to the more traditional businesses, when you run gross margins significantly above mid-30s, do you have to add more staff? Do you have to spend money with outside consulting firms to build more substance to your offerings? How should one look at this?

I think like O'Neil was saying, there is a lot of operating leverage in the model so as revenues grow and we are able to accommodate those revenues within the existing physical infrastructure but also within the existing variable or quasi-variable spend in management and things like that, then you see a tremendous amount of contribution margin falling to the gross margin line and to the earnings line. And that is really what is going on. It doesn't involve having to tap into external consulting or anything like that.

Coming back to the IADS business, since it is the basis of proprietary software which you have developed, should we assume that as that business comes into its own that its perspective gross margins or higher than what your traditional businesses are capable of generating?

I think it will depend upon the mix. The software component is indeed we are selling licenses to particular pieces of software but likely could be higher gross margin. But when we are selling the software as a component of our overall service, I think the margins would probably be again consistent with the margins that we are targeting on a modeling basis.

All right, thank you.

(inaudible)

Hello, actually my question has been answered. Thank you.

Joe Furst.

Just a follow up on this registration thing. Again given the amount of cash you already have and your history of not really wanting to make acquisitions, is it reasonable to assume that one of the reasons you might want to have this shelf offering is because some of these potential customers and ideas would give you large enough contracts that they want to see you have more capital available to be able to meet their requirements?

Joe, we haven't heard it articulated that way by any customer at this point. People that we're working with have looked at who we are, they have looked at the way we have managed the balance sheet and they seem happy with what they see. I think what we are thinking about is less having to create a more substantial balance sheet and more being able to seize opportunities.

Okay, thank you.

(Operator Instructions). George (inaudible)

Good morning, Jack and O'Neil. A question on the non-eBook content business. You said it has been roughly $14 million per quarter, relatively flat. Is there much change within that $14 million? Are some programs or some particular work that you do growing and others declining or that has been sort of fairly consistent revenue from fairly consistent customers?

Sure, George. It is a combination. We have brought in new customers that have substituted for some of the existing customer programs within that $14 million decreasing. So new customers are being brought into that. As we have said in our -- emphasized more on our last call, one of the great accomplishments even within that $14 million has been to substantially improve the margins. So as we finished projects and we were bringing new projects in, we were bringing them in in a way where the margins were much more clearly aligned with our target margins. That was a great accomplishment.

Last year we also did quite a bit, it was a transformative year for us in terms of doing a lot of work on our salesforce and our more general toward the end of the year go to market strategy and I think -- and revitalizing our marketing program as well. So I think this year I am very excited, I am very optimistic that the work that has been done transformatively last year is going to start to result in some good traction there.

And I am hopeful that we will be able to report to you that we are breaking through that $14 million barrier in the course of the year.

Okay, great. Thank you very much.

There are no further questions at this time. I would like to turn it back over to Jack Abuhoff. Please go ahead.

Thank you, Operator. So I guess just to recap a bit, quarterly revenue, gross margin, net margins were all up sequentially on year-over-year. Our revenue this quarter was an historical high. We have got a solid strategic plan in place for this year in terms of eBooks. We will be substantially extending our capabilities in the remaining content services segment we will be progressively migrating from often commoditized kind of task-based services to progressively more transformative services that have in many cases product-like attributes.

On the IADS front, we would begin to capitalize our investments by driving revenue. So there is across those markets, there is a lot of good we can do helping companies reinvent their products and their operations for a digital future. We are excited by that.

Thanks everybody again for joining us today. I will look forward to sharing with you our continued progress as we move further into 2012.

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