Innodata Inc (INOD) 2012 Q2 法說會逐字稿

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

Thanks, Jenny. 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'll hear from Jack and O'Neil and then take your questions.

First, let me qualify that forward-looking statements 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 are Innodata advanced data solution segments subject to the risks and uncertainties of early-stage companies, the primarily at will nature of the Company's contracts with its content services segment customers and the ability of the customers to reduce, delay or cancel projects, continuing content services segment revenue concentration in a 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] to 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 strategy, the emergence of new or growing competitors, various other competitive and technological factors and other risks 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 over the call to Jack Abuhoff.

Thank you, Amy. Good morning, everyone. Thank you for joining us. I'm calling in from London today where I'm in client meetings this week and O'Neil is with us from our New Jersey offices. I will review our second-quarter 2012 results and update you on important progress we've made this quarter on our strategic plan.

Revenue in the second quarter was $22.8 million, an increase of 40% year over year but a sequential 9% decline from our record first quarter which as we said in our last call reflected higher than expected e-book volumes. Our gross margin remained at 36% consistent with our two prior quarters.

Our three-year strategic plan announced first, first-quarter 2011 targeted making Innodata a globally respected $100 million revenue company in the ensuing three years. The plan called for us to create a new segment called IADS and to drive some fundamental changes in our Content Services segment.

I'm pleased to report that in the second quarter we made significant progress in IADS, specifically on Synodex, the medical data analytics part of the IADS business.

We completed our substantial workflow and tools build. We successfully established information security practices in compliance with both HIPPA and the Data Protection Act which are the respective laws in the US and the UK that govern handling sensitive personal medical data. We became ISO 27001 certified enterprisewide and we passed two external audits for our new information security infrastructure, one by Ernst & Young and another by Churchill and Harriman, both leaders in risk assessment.

With these now in place, we can begin accepting work from clients.

On the client side, which we've been developing in parallel with our systems we are now in active discussions with more than 50 major firms in life insurance, health care and pharma in both the US and UK markets.

For eight of these firms we have conducted or now about to be conducting preliminary filings. The feedback we are getting is consistently positive. For example, one established industry leader told us that the Synodex process is truly, and I'm quoting that, innovative and game changing.

On a he first further positive note, Synodex closed the quarter by signing its first major client in the healthcare sector with an expected annual revenue potential of $500,000 to $2.5 million although start-up revenue has not been meaningful to date.

We recognize that there are risks, some of which are unknowns and we will be managing these carefully. Some of these are unknowns which could no doubt have the effect of delaying revenue but the reception we are getting in the market has given us confidence that the market potential of what we put in place is huge and high-quality potential revenue.

Last week, on the strength of the progress we've made on our systems and the reception we are getting from prospects, we made the decision to double the size of our preoperational production team.

On the docGenix side, we are somewhat less advanced than we are on the Synodex side. We have now completed the first phase of implementation for a major bank and they've given us good reviews and have expanded the engagement. The pilot for another major bank that I spoke of in our last call was also successful by its terms but, unfortunately, our sponsor moved into a different division of the bank and his replacement has decided to stay with a cheaper more conventional approach to managing legal risks and derivatives documentation.

From a product perspective on docGenix, we're now taking a bit of a step back to retrace some of the product marketing decisions taken by others prior to our acquisition of this business to be sure that the product is doing with the market requires at the price of the market is willing to pay.

Taken as a whole, we believe that our IADS strategy and its expansion is the right strategy to even out the revenue fluctuations that are characteristic of our content services business and to ultimately reduce the concentration of revenues.

On the content services side now, I'll talk about general content services first and then I'll talk separately and specifically about e-books.

Over the past year, we substantially rebuilt our content -- our general content services sales team, the pre- and post sales support teams and the marketing organization in order to accommodate shift in selling more strategic services and solutions.

On the sales side, we kept roughly the same sales headcount, now 11 people. But 50% of them are new recruits we brought in within the last 12 months in order to upgrade the team's skills. On the pre- sales and post outside, we brought in four new people to take a more active role in developing and managing the day-to-day relationships with customers and on the marketing side we brought in a new marketing VP.

On one important measure we've been successful, on a second important measure for starting to show success and on a third measure which is ultimately the most important measure we've not yet demonstrated success. But I believe that we will be demonstrating success very soon.

The measure where we've seen great success is project margins. We've seen a 13 percentage point improvement in the direct labor margins of projects we are bringing in versus the margins of projects we are replacing. To date, this is largely due to improved pricing discipline. Going forward, we anticipate that our margins will be achieved by undertaking engagements which are more strategic to our customers in combination with pricing discipline.

People pay more for strategic solutions than they do for what they perceive as a commodity.

The second important measure where we are now starting to see success is a substantial overall growth in our pipeline opportunities. And I consider a full third of the opportunities with which we are now engaged to be strategic or transformational in nature. This could be said only for a small handful of content services opportunities in 2011.

In the second quarter we provided technology innovation seminars for 34 companies, including several of our largest clients and solution showcases for seven companies. We will be continuing these sorts of activities as we see them as an effective way of showcasing our more strategic capabilities for our clients.

We are encouraged that these technology innovation seminars and solution showcases have yielded significant discussions around opportunities almost right out of the gate, exceeding our expectations.

The third and most important measure of course is revenue growth. If you take e-book services revenue out of the picture and look at the past six quarters in general content and services, the impression you get is that we hit a glass ceiling at about $14 million in revenue per quarter. But given the overall increase in pipeline value and the successful marketing programs, Jim Lewis, our SVP of Sales, believes he now has in place both the talent in the pipeline to break through this glass ceiling.

That said, if for some reason non-e-book content services growth doesn't begin to materialize near term, we will have a plan in place to reduce spend in this area.

I'll now turn to e-books. In the second quarter, e-book services accounted for 44% of total revenue. E-book services and, more particularly, e-book services for a new key customer accounted for most of our 2011 growth and also resulted in us substantially exceeding our Q1 forecast due to higher than anticipated demand from this key customer. The sequential decline in revenues during the second quarter in large part reflected the decline in revenue from this customer and we anticipate a further decline in the second half.

In a general sense, we're seeing our retail e-book platform customers lowering their budgets for subsidizing standard English-language content, which has been responsible for our first wave of revenue growth, even though there is still a growing influx of English-language publishers who want their content on the platforms. But we believe the platforms will increasingly direct their spend in favor of international content and enhanced e-book content.

So looking at it from our perspective, plain-vanilla English-language content was the first wave for us here and we anticipate non-English language and enhanced content will form the second and third place respectively.

To prepare for these upcoming waves we have expanded our capabilities. As a result of our development efforts, we are now able to handle books in a wide variety of foreign languages, including ideographic languages such as Korean and Japanese. We have coordinated our development efforts in this regard closely with our major clients who see these capabilities as being strategic for them.

We have already seen several of the major retail platforms opening e-book stores in different parts of the world. And we believe that this trend will continue in 2013, making e-books not just an American phenomenon.

The second and third waves are just starting to trickle onto the beach. In the past month, we've started getting in work from several new international markets with more promises. And we are ramping up production on high-end enhanced media content as well.

As you can see, there are several moving parts that will determine revenue for the second half. On the IADS side, we think that the momentum we achieved in Q2 will begin translating into revenue soon. On the e-books front, revenues will decline in the second half as platforms constrain their spend on English language content -- what we are calling the first wave -- but we're seeing clear evidence of waves two and three forming up, to ramp international content and enhanced e-books. But it is tough to predict exactly what the magnitude of these waves will be and when they will hit the beach in force. We are optimistic that we have the technology, strategy and client relationships to capture these waves as they begin heading to shore.

In terms of non-e-book content services, we are looking to break through the $14 million a quarter glass ceiling either in Q3 or Q4. Factoring all of this together at this point, we are going to forecast third-quarter revenue to be in the range of $18 million to $20 million with sequential growth slightly following in Q4. We anticipate overall growth in revenue for 2012 taken as a whole.

I'll now turn the call over to O'Neil who will provide additional insight into our Q2 financial results. After that we will take your questions and then 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 financial results for the second quarter ended June 30, 2012. As in the past, I will review our sequential financial results by comparing our second-quarter 2012 performance with our performance in the first quarter.

I'll also share my perspective along with the financial details. Towards the end of my review, I will spend a few minutes discussing our capital expenditures, working capital, foreign exchange hedges and investments in IADS.

Our total revenues were $22.8 million in the second quarter compared to $25.1 million in Q1, a sequential decrease of 9%. Revenues were lower by $2.4 million primarily as a result of lower e-book volumes from a key client which reduced revenues by $1.8 million and the completion of the $600,000 test project within our IADS business the first quarter.

Our top three clients contributed 54% of revenues in Q2 2012 compared to 56% in Q1.

Our e-book services accounted for 44% of our total revenues in the second quarter compared to 47% in the previous quarter. As Jack mentioned, we expect our e-book revenues to trend lower in the next two quarters.

Our gross margins changed in line with our revenues. In absolute terms, gross margins were $8.1 million this quarter compared to $9 million in the first quarter. But as a percentage of revenues, our gross margin was consistent at 36% in both the quarters.

This current quarter's amount includes $800,000 of costs net of revenues for maintaining production capacity in our enhanced data solutions business, compared to $1 million in the prior quarter.

Excluding these costs, the gross margin in our content services business was 39% in Q2 compared to 41% in the first quarter, reflecting the impact of operating leverage caused by lower revenues.

Looking ahead, we expect our gross margin as a percentage of revenues to decline over the next two quarters. This is primarily as a result of lower revenues and the negative impact of operating leverage.

Our selling, general and administrative expenses were $6.2 million in the current quarter compared to $5.4 million the previous quarter and an increase of $800,000. SG&A expenses as a percentage of revenues were 27% this quarter compared to 21% in the first quarter. The increase in SG&A expense was on account of higher spend in sales and marketing of $450,000 and higher expenses of $350,000 in administrative expenses. Of the $450,000 increase in sales and marketing, $300,000 was in content services, and this was from early attributable to cost of new hires of $50,000, expenses on trade fairs of $100,000 and the balance $150,000 due to accelerated accruals on account of new sales incentive plans.

The $150,000 increase in sales expenses in IADS was due to new hires and travels.

The increase in G&A expenses was primarily due to one-time impact from reclassification of an expense amounting to $250,000 in the IADS business and the balance of $100,000 was on account of new hires and wage inflation.

On a segment basis, total SG&A expense in IADS was $900,000 in the second quarter compared to $500,000 in the first quarter. And the corresponding figures were $5.3 million and $4.9 million in content services.

We expect our SG&A expense to be in the range of $6 million to $6.3 million per quarter for the rest of the year.

Moving down to pretax earnings, our pretax earnings in the second quarter was $2 million compared to $3.7 million in the first quarter. The $1.7 million decline in pretax earnings was primarily due to lower gross margins of $900,000 and an increase in SG&A expenses of $800,000.

These pretax earnings are net of IADS start-up costs of $1.7 million for Q2 and $1.5 million for the first quarter.

Excluding these IADS costs, pretax earnings were 16% of revenues for our content services business in the second quarter, down from 21% in Q1.

In the current quarter, our tax expense was $400,000 or 19% of pretax earnings versus $900,000 or 24% in the first quarter.

Getting down to net earnings, our net income for the second quarter was $2.1 million or $0.08 per diluted share compared to $3.4 million or $0.13 per diluted share in the first quarter.

I will now turn to our cash flows and balance sheet. Cash generated from operations was $2.5 million this quarter compared to $8 million in the first quarter. In the first quarter, our cash flows are higher because of collection of the past few account receivable balance from a key client and higher earnings. There was no change in our liquidity position. Cash, cash equivalents and investments and term deposits with banks were $23 million in both at the end of this quarter and at the end of the first quarter. In addition, our liquidity sources include a $15 million unutilized line of credit.

Let me now review our capital expenditures, working capital and foreign exchange hedging program. We incurred capital expenditures of approximately $2.4 million in the second quarter compared to $2.1 million in the first quarter of 2012. The capital expenditures in Q2 primarily include $600,000 for assets that could be utilized by our IADS business, $1.3 million to expand our delivery centers in Asia for both our businesses, and $500,000 for routine CapEx.

As we have completed the expansion of our delivery centers in Asia, we expect our CapEx to decline next quarter to between $1 million to $1.5 million of which approximately 50% will be for IADS.

Looking at working capital, there was no significant change in our account receivables which were $19 million at the end of both the first and the second quarter. Our DSO or day sales outstanding was 76 days in second quarter compared to 74 days in Q1.

Let me now review our inventory of foreign exchange hedging contracts. As of the end of the second quarter, we had outstanding foreign currency forward contracts of $19 million to hedge our foreign currency risks for our operating expenses in Asia. We had notional unrealized losses of $600,000 on these forward contracts as of June 30, 2012, which is primarily as a result of the depreciation in the value of the Indian rupee by approximately 20% against the US dollar. We recognized the gains [or] losses on these qualified hedging contracts in our income statement as and when the contracts mature. But on the positive side, these losses are more than offset by the higher margins we made as it takes fewer US dollars to operate our Asian operations.

I will now conclude with a brief summary of IADS. Total cumulative investment includes the start-up operating losses until the end of June 30, 2012 at $8.7 million. Our investment in IADS is now running at a rate of $2.3 million per quarter of which $1.7 million is to our income statement and another $600,000 in CapEx.

As Jack mentioned, we have made good progress in building our technology platform and we are in active discussions with more than 50 major firms in the healthcare sector for business.

With that, I will now open the line for questions.

(Operator Instructions). Charlie Pine, Van Clemens & Company.

Hello. Good morning, everyone. I'd like to direct a couple of questions. To begin with I would like to get a little bit more clarity on some of the dynamics of what you were referring to in the e-book segment. You note in your remarks and on the call that there was a decline and you're attributing that primarily to a shift from into content and other lang -- non-English language and to enhance content and that this one particular large client has shifted their spend into those areas.

My question, I suppose, is at this juncture is this -- is this client, they must be spending money with somebody on this stuff and they must be doing non-English language books with some other service providers and enhanced content with other service providers because with the explosion of tablet sales and e-book sales across the world, and more and more publishers coming on, it just seems odd that there is actually a contraction going on here. So, are you actually losing business to other e-book service providers and is this customer going elsewhere in seeking out this business in non-English language capabilities and in enhanced content capabilities?

Charlie, thanks for the question. No, I can state emphatically that were not losing business to competitors in this area. If you look at what's going on in e-books even though there is e-book content in other languages certainly, from a perspective of the large platforms, the Amazons, the Apples, the Kobos, the Sonys of the world, e-books has been an American phenomenon. It has not been a global phenomenon.

Now that said, and I'm not speaking about any single client when I say this, but looking at the platforms generally because I won't speak about any single client, it's not my place to. Looking into the platforms, generally, you do see that there are significant efforts being made at launching e-content stores globally and those efforts started a little bit late earlier this year and we begin. They're going to pick up in 2013. We think there is a very rich, very important market for us in international content and we are very excited about it.

As I said in my remarks, we've been building our capabilities in this area and the fact that we're now in a position to handle an assortment of languages including ideographic languages puts us I believe in a very exciting place and a place that our clients are viewing as being strategic for them.

What about in regards to your reference to due to this client shift, though, to enhanced content? I mean, are they spending money on more e-book work and enhanced content? And if so are they doing more that with you or who are they doing it with?

Sure, and again it's our policy not to talk about any client specifically so what I'm -- in my remarks I'm looking at the market as a whole and sharing my perspectives on the market.

Most of what's being sold on the platforms today is not enhanced content. There is a tremendous interest in enhanced content but for the most part what's being sold today is English-language, plain-vanilla content.

The work that we're doing now, I believe, is going to grow. We've clearly established our capabilities in this regard and we think is a strategic matter producing what are essentially print layouts of print books on a platform that can do a whole lot more from a multimedia and an integrated media perspective is clearly going to change. So I think we're in a good position in order to accommodate that change and to grow with our clients.

Okay, well, I'm following that. I guess I'm just a little bit, I guess possibly I am not quite understanding, though, the reference that this particular large e-book client shifted their budget priorities out of standard English-language content to international and enhanced content. And the inference there is that they're spending money in other areas besides English language content. I mean, does that means that they are spending it with you or are they spending it with somebody else?

I think I have already answered that to the best of my ability. As I said we've not lost market share in any of our e-book platform clients. And as I've been saying consistently, the spend, I believe, will come in waves. It will not be a consistently rising spend. That's the nature of the spend tracing or tracking somewhat dynamic strategic priorities. So I hope that's helpful.

Somewhat. Let me follow up with a question on the IADS area in particular, I guess, your docGenix, some of the docGenix comments. What in particular are you grappling with? Last time around on the call you had more specificity regarding docGenix than almost that nothing whatsoever about Synodex and now it's sort of seems to have flipped. It sounds like almost all the pilots you've got and all the prospects you have going right now are firmly in the Synodex area. Can you try to give us a little bit more color and clarity as to where things are playing out with docGenix and what it is specifically you're trying to do as far as changing the solution and the pricing?

Sure, be happy to. We're further along on the sales side on Synodex because we've had a concerted effort over the last several months in parallel with our systems development in broadening our market. We believe that there's a very significant opportunity there for us and we believe very much in the platform that we've put in place.

On the docGenix side, we've had a couple of pilots; we have a couple of other smaller customers going. But we have not put the push behind it in terms of the sales side yet because we wanted to learn a little bit more about the market we wanted to have a couple of pilots under our belts. Now, I talked about there being two pilots, one was for or one is with a major bank. We are largely completing its first phase in getting good reviews there. On the second one when our -- and I was disappointed on this because when our sponsor moved out and some of the more conventional thinking people came in, I think they may have been scared off by our approach. And what I mean by that is, we need to make sure that the product isn't too oriented to what would be called innovators or early adapters -- adopters rather. And we need to check and see whether we need to tweak the offering of it to ensure that the early majority, the larger part of the customer spectrum would also view the product favorably. That it's not too complicated for them.

So on the docGenix size, we are going to do some of that revalidation, make sure that we're targeting the right segment of the market, the early majority if you will and go from there.

I've got two quick follow-ups in this area. First of all are you seeing in the docGenix area right now in the derivatives tagging and legal documents, metadata work that you want to do, how would you characterize the competition you're seeing in that area?

I think there are a couple of types of competitions. One competition is internal, legal departments, large financial services institutions decide to do it themselves or to do -- well, not to do what we do themselves but to do something themselves that they believe is adequate to address the legal risk in these instruments.

The other thing that we see is them taking a traditional approach of pulling out select data points either themselves or using an LPO provider and putting those points in basically a spreadsheet or a simple database. Our product is a lot more than that. It's much richer and enables a level of downstream reporting to collateral systems in an automated way that those other solutions do not. It enables very detailed, very complex querying to be done so a bank can understand the [risk-benefit phases] in any number of different disruption scenarios or market scenarios. It enables people to understand their counterparty exposure very, very well.

And again we think the product is very interesting but we have to be very careful that we're targeting a sufficiently broad aspect of the market that we can get the traction we need to meet our objectives.

We're looking through Synodex, docGenix, that these things should themselves be $100 million dollar companies. If we can't -- if we think that it can't get there we are going to lose interest were going to shift investment.

Thank you. Follow-up last question. You put -- you spent a lot of CapEx in bulking up a couple of your offshore centers over the last several quarters and you apparently have hired a lot of people and reinforced the capabilities for a lot of this new business. In light that some of this isn't coming onstream, what are all these people doing right now?

Well, everybody is -- a lot of the CapEx work we do is not the hiring of people. When we hire people that's operating expense. The people that we've hired into these efforts are very, very busy. Developing the capabilities that were putting in place don't happen by themselves. We are taking some risk there but we think the rewards are substantial.

Charlie, thank you for your questions, probably best to get back in line and we will let some other questioners (multiple speakers) at this point. Thank you.

Tim Clarkson, Van Clemens.

Hi guys, just a couple of questions. What kind of volume would you have to do with the IADS to break even?

Dollar volume of business?

Yes.

O'Neil, do you want to pick that up?

Yes, the -- in terms of the current operating expenses running at about approximately $1.7 million per quarter and to break even, we currently need approximately about $5 million of revenues.

$5 million, okay.

Keep in mind the way the business will look as we continue to build this business out is obviously we will look at the prospects on the pipeline, we will make a judicious decision, if some of them are coming at it faster then we would have to build up production capacity. So what you will see in terms of the P&L going forward would be a combination of other factors that could impact the P&L as it lays out.

Okay, just on a -- understand it's obviously been a little bit of a shift towards excitement towards Synodex. What's the value added on the services that got a contract, what's the value added for doing that service? Why are people excited about your product?

I think what they're seeing and these are firms as I said life insurance, healthcare, pharma, they are seeing that some of the ways they need to or that their process with which they're currently interacting with health records are less than effective or efficient. And what we are able to do is give them a vision of how they could operate in a much more effective and efficient process using our product set. I'm not going to go into a lot more detail right now for competitive reasons. All the firms that we are in discussions with we've got NDAs with in order to preserve that competitive advantage at this point.

What's the potential size of the markets?

I think it's very huge. For us it could be very, very significant and, again, like I said for -- in response to Charlie's question a few minutes ago, we're really not interested in investing in anything that is product-oriented that couldn't be a $100 million business soon. On the Synodex side, I think that we believe that we easily achieve that threshold.

And what kind of margins would you have in that kind of a business?

I think from a margin perspective we should be thinking that it meets our margin thresholds very clearly and you know what we're targeting is, of course, approximate 40% gross margin on that ongoing basis.

And this business that would obviously be more repeatable?

Well yes. I think that's one of the most important aspects is exactly that. It's the repeatability, the work that we bring in through the Synodex portfolio, we believe, would be largely if not exclusively recurring.

Right, okay, I'm done, thanks.

(Operator Instructions). Vincent Colicchio, Noble Financial.

Thanks, Jack. A couple questions. Would you say your sales pipeline potential business increased sequentially versus where you were last quarter?

Yes it did and I have to qualify what I'm about to say with the obvious, a pipeline is only a pipeline, right? But if I look at the pipeline from an opportunity -- aggregate opportunity, aggregate value perspective, it actually increased by 50% beginning of the quarter till the end of the quarter. That's a pretty big number for us. And that's giving us confidence that this glass ceiling that I talked about in general content services can and will be busted through.

And last year when you said a strategic goal, two of the goals were bookings growth of 20% per year and also to hit $100 million in revenue by 2013. Are those goals still current to your thinking?

They are. I think that the right goals for us to have. And again we've got a number of different irons in the fire that are contributing to us achieving those goals. You know, we have got the development efforts in Synodex and docGenix, the IADS efforts. We've got a general core content services business that we're working on in terms of our offering and our sales and marketing, go to market approach and then we got the e-book business. So there are a bunch of irons in the fire, we are carefully managing each of them in order to achieve those goals.

So a 20% bookings goal still seems reasonable for the year. Is that -- would you agree with that?

Yes.

And did the DOJ case -- do you think it had a slowing impact on e-books market at all in the US?

Yes, not at all. Not at all. The people that I talked to, as you might expect, largely believe the decision was wrong. And we aren't seeing that any -- the platforms or the publishers are not seeing anybody slow down in terms of enthusiasm for where e-books are going.

Okay and what will it take to occur in your business to hit the high end of your guidance for the upcoming quarter versus say the low end?

So much is about timing and it's very difficult for us to accurately predict timing. What we do is we look at what's booked and we revenue project off what's booked; we look at what's late stage and we project off there; and then things that are earlier stage we don't even project from. So, as I said in the call, there are several moving parts and to the business generally when we look very, very narrowly near term, it's a line by line projection and that's where we try to do our best at projecting them.

And just two more questions related to docGenix. I [didn't] hear what you were saying in your prepared remarks about bank number one on the docGenix side, the one that you know generated revenue last quarter -- where does that start relationship stand right now?

The relationship is good, we are doing some very good work there. The component of our -- the proponents of our service there is I believe an early adopter. He's very enthusiastic about what he's receiving, our product is turned on, he's using it. We've expanded engagement, we're doing some more documents there as well. He's referring us to other places within the bank where he feels the need may be even more significant. And we've done some downstream integration, we've built some systems in order to tie into their collateral management systems. So, they're really using the product for what it's -- what it was envisioned to be.

Jack, I think Vince is asking about the client that we earned revenues from the previous quarter which is a test project. I think which you referred to in your script as well. So you might like to go over that --

I'm sorry --

Right so yes --

Clarify that, so there are two clients I am referring to the first in our as I said just earlier, the pilot from who we earned substantial revenues in the last quarter, the pilot was viewed as being successful by the sponsors of that pilot. Where we became unlucky was that sponsor got a new job basically moved to (multiple speakers)

I see.

The successors of that person came in and said this is a little too fancy for us, we're comfortable doing things the old-fashioned way.

I see.

And again, it was that experience that gave us pause and made us think, gee, maybe this is a little too oriented to the early adopters, maybe we need to think about how we broaden this so that it has some more general appeal.

Okay and then IADS revenue, was there any revenue in the quarter, O'Neil?

It's been very marginal, about $100,000 approximately.

Okay, that's all I have for now. Thanks.

(Operator Instructions). Joe Furst, Furst Associates.

Good morning, gentlemen. I just have one question. I wanted to clarify something. The 50 potential clients you are talking about in the Synodex area and so on. Are you basically saying that all 50 of these clients seem to be pleased where they are offering you half of them at all or [in some states] considering doing some business with you. Is that a reasonable statement?

Yes, the 50 are and as I said we -- in trying to think now, the 50 are. We've had discussions with more than 50. Of the discussions we've had I think there was only one client, it's a very small client whose idea -- this doesn't really make sense for my business. So the enthusiasm has been very substantial and again to reiterate, yes, all 50 are in the pipeline.

All right, good. And you were saying that potential business in this area that you think it could be as much as $100 million annually?

I think that it could exceed that.

Good. Thank you. I appreciate it.

With no further questions in the queue, I would now like to turn the conference back over to Jack Abuhoff for any additional or closing remarks.

Operator, thank you. To recap a bit, I guess, quarterly revenue was up 40% year over year but it was down 9% sequentially albeit from an unexpected Q1 high. We're feeling good about being able to deliver growth this year although we're anticipating a likely revenue dip in the second half as we turn the corner from plain-vanilla English-language e-book conversion platforms to foreign-language e-books, Japan's e-books. Current customer interest in our IADS segments, specifically Synodex, is very strong. We believe this will be an important and a sustainable growth driver going forward. Timing is, of course, something yet to be determined.

I thank everybody for joining today and I, of course, look forward to sharing with you more as our progress continues on all of these fronts. Thank you.

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