Innodata Inc (INOD) 2012 Q3 法說會逐字稿

Good morning and welcome to the Innodata third 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, Mack. 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'Neill and then take your questions.

First, let me qualify the forward-looking statements that are made during the call. These statements are based (technical difficulty) [historically] and are subject to a number of risks and uncertainties, including without limitation that our Innodata Advanced Data Solutions segment is subject to 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 and a limited number of customers; continuing Content Services segment reliance on project-based work; inability to replace projects 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 give rise 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 will review our third quarter 2012 results and update you on our strategic plan progress.

Revenue in the third quarter was $19.7 million, an increase of 2% year-over-year, but a sequential 13% decline from our second quarter. Revenue ended up at the high end of the range we provided as guidance last quarter and reflects an anticipated second-half decline in e-book revenue from a major customer. Revenue from this major customer declined by $3.8 million from Q2 levels, partially offset by a $750,000 increase in general Content Services revenue.

The decline in e-book revenue reflects a decline in customer budgets for large-scale conversions in support of domestic digital bookstores. We anticipate that the next waves of customer requirements are in support of new global markets and interactive digital books.

I'll take each of these in turn. First, new global markets. As e-readers and tablets, such as the iPad and Kindle gain traction globally, retail platforms are increasingly launching music and book services that are entirely localized in terms of language and provide large inventories of local content. We've seen the beginning of this in 2012 and we think that this will gain momentum in 2013. We will benefit from e-books becoming more of an international than a strictly US and UK phenomenon, as I expect that we will have the opportunity to help platform providers build their inventories of local content.

It is for this reason we're working to expand our e-book production capabilities to include a long list of foreign languages, including complex languages, like Japanese, Chinese, Russian and Arabic that do not use the Roman alphabet. In the third quarter, we began delivering Japanese e-book content, producing several thousand books. And last week, a lead executive from one of our major e-book customers called me specifically to say that our Japanese deliveries have surpassed his expectations in scale and quality.

In a report on the global e-book market presented this month at the O'Reilly Tools of Change Conference, the author exudes that a -- now I'm quoting -- handful of global players with extremely deep pockets -- Amazon, Apple, Barnes & Noble, Google and Cobo -- are about to redraw the world map of books, publishing, reading and learning -- close quote -- by launching localized e-book distribution stores. While it is exciting to view our emerging capabilities in the context of this expanding global distribution framework, a few words of caution are needed. First, our customers have not yet communicated to us their expected 2013 spend levels in this regard. Secondly, there are numerous challenges that the major players face, ranging from taxation to piracy, as the roll out their e-book services on a truly global scale.

I will now turn to interactive digital books, the second likely new wave of requirements. In the third quarter, we made some important advances in providing services around enhanced and interactive books. We created multi-disciplinary teams working both from our facilities and at select client sites, providing content architecture, graphical design and programming services for enhanced and interactive books, creating wholly new user experiences. We completed about 120 enhanced and interactive e-books so far and have more in the works. We are one of two digital content services companies partnering with Inkling, a San Francisco start-up founded by an executive from Apple's education division, to create and distribute media-rich interactive content for textbook publishers on the iPad. We began working with Inkling in earnest earlier in the year. Inkling is backed by Sequoia Capital, McGraw-Hill and Pearson. It produces software that addresses the challenge of collaborating and producing iPad e-books filled with lots of multimedia, as well as guided tours, 3-D exhibits, high-definition video and interactive experiences.

Here's a great example of what's possible in interactive books. In the popular how-to manual from O'Reilly Media, lessons in coding JavaScript provide readers a box in which they can test and run their own attempts at coding, all directly within the e-book. If you want to see what these textbooks of the future look like, I would encourage you to check out a demonstration on YouTube by Matt MacInnis, Inkling's CEO. You can also go to Inkling's website and download a copy.

This is exciting stuff, but publisher uptake and how it translates into revenue for Innodata is still largely unpredictable. Therefore, we have been hard at work executing a strategy to create new revenue streams that should provide greater going-forward visibility and predictably. In early 2011, we created a new division, Innodata Advanced Data Solutions, or IADS for short, to incubate new business ideas which, if successful, would bring us solid growth opportunities and high quality, predictable revenue streams. We believe that IADS will be an important contributor in 2013 to our three-year strategic plan announced in the first quarter 2011, which targets making Innodata a globally respected company with a $100 million revenue run rate by the end of 2013.

Our out-of-the-gate IADS strategy was to put an iron in the fire in two new markets simultaneously, the first being healthcare and insurance, the second financial services. Over the last few months, we have become progressively more bullish on our accomplishments in the healthcare and insurance space and less bullish on what we have achieved in financial services. For healthcare and insurance, we believe we have built a truly differentiating product and service in our new Synodex division, on the strength of which we have cultivated significant prospective customers. Getting deals signed is taking time, but for good reasons -- we needed to put in place and constantly improve an infrastructure that is readily expandable for expected growth and the certifications required to handle sensitive healthcare information, and we need to evangelize our service to convince our customer prospects that we have invented a way for them to significantly improve the way they work.

We are encouraged with how this evangelizing has been going. This quarter, the keynote speaker at a convention of national insurance underwriters expressed in his keynote address his confidence in Synodex's development. Here's another validation from this quarter. In addition to prospective customers that are discussing a fully managed service, several companies have expressed an interest in licensing our technology to use within their own internal operations. So we believe we are on the right path, and I anticipate that during the next few quarters we will be signing some important customer contracts.

If we are as successful as we think we can be, we will be signing multiple multi-year deals and the revenue swings that have historically plagued Innodata as the large customers' project waxed and waned will be much less of a problem. So based on what we see and given the importance of what we are trying to accomplish, we are doubling down our bet on this new business.

In order to direct more investment spend to Synodex, just this month we decided to reduce our spend on the financial data side of IADS by an annualized $450,000. That's not to say that we are not seeing good opportunities in the financial data space. It's just that right now, based on what we have in place and the market opportunities that we are seeing directly in front of us, our opportunity in healthcare and insurance is more compelling.

I will now shift the discussion back to the Content Services segment. In the third quarter, revenues from our Content Services segment net of revenues from its largest client increased modestly to $15.2 million from a plateau in the $14 million range that had prevailed for the first two quarters of the year. As we have discussed before, we have substantially rebuilt our content services sales team to accommodate a shift to selling more strategic services and solutions, and the team has successfully driven a 13-percentage-point improvement in the margins of projects they have brought in versus the margins of projects they replaced. It is gratifying to see that the team's work is starting to show on the revenue side. They are leading new initiatives, like providing what have been very well-received technology innovation seminars and solution showcases for our clients.

At the same time, the team has been able to take stock of what has been working and what is not, trimming our sales, marketing and consulting spend in Content Services by approximately $2 million per year. Accomplishing this $2 million in takeouts cost us approximately $200,000, almost all of which was incurred and expensed in the third quarter.

Looking out to the fourth quarter, on the revenue side we are forecasting revenue to be in the range of $18 million to $19.5 million and anticipate overall growth in revenue for 2012 taken as a whole.

I will now turn the call over to O'Neill, who will provide additional insight into our Q3 financial results. After that, we will take your questions. 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 third quarter ended September 30, 2012. I will follow my past practice of reviewing our financial performance on a sequential basis, which I will do by comparing our third quarter 2012 performance with our performance in the second quarter. Along with reviewing the financial details, I will also share my perspectives. After completing the financial review, I will briefly go over our capital expenditures, working capital, foreign exchange hedges and investments on the Advanced Data Solutions business.

Our total revenues in Q3 was on the high end of our revenue guidance, reaching $19.7 million compared to $22.8 million in Q2. Revenues were lower by $3.1 million, primarily as result of lower e-book volume from a key client, which impacted revenues by $3.8 million, and this was partially offset by higher revenues of $750,000 from other clients in our Content Services business.

Our top three clients contributed 43% of revenues in Q3 compared to 54% in Q2. Our e-book services accounted for 34% of our total revenues in the third quarter compared to 44% in the previous quarter. The primary source of revenues in Q3 was our Content Services business and our Advanced Data Solutions business is working on two contracts from which we expect to report revenues in the next quarter.

Looking ahead, we remain committed to our three-year business plan and revenue aspirations that we shared with you earlier. As part of our continuing planning process, we also conducted an internal review of our operations this quarter with the objective of achieving higher efficiencies in production and in selling, general and administrative activities. As a result, we restructured some of our operations, which will produce a total cost savings of about $2.5 million per annum beginning next quarter. We expect 20% of these savings to accrue in production or the cost of goods sold level and the balance, 80%, in SG&A.

Now let me review our gross margins. Gross margins were $6.2 million or 31% of revenues this quarter compared with $8.1 million or 36% of revenues in the second quarter. As a percentage of revenues, our gross margins were lower this quarter, reflecting the impact of operating leverage caused by lower revenues. In Q3, we incurred $600,000 in costs net of revenues for maintaining production capacity in our Advanced Data Solutions business, compared to $900,000 in the prior quarter. Gross margin in our existing Content Services business was 34% in Q3 compared to 39% in the second quarter. Our SG&A expenses were $5.2 million in Q3 compared to $6.2 million in the previous quarter, a decrease of $1 million. This $1 million decline primarily reflects a $600,000 decline in accruals for incentives and stock compensation and a $400,000 decline in expenses for marketing events, travel and various discretionary expenses, as well as timing differences and adjustments. As a percentage of revenues, SG&A expenses are steady at 27% in both quarters.

On a segment basis, total SG&A expenses in Advanced Data Solutions business was $700,000 in the third quarter compared to $900,000 in the second quarter, and the corresponding figures were $4.5 million and $5.2 million in Content Services. We expect our SG&A expenses to be in the range of $5.5 million to $5.8 million in Q4 after providing for anticipated higher expenses in the fourth quarter due to seasonality, which will be offset by cost savings we expect from restructuring.

Getting down to pre-tax earnings, the combined effect of lower gross margins of $1.9 million, offset by lower SG&A expenses of $1 million, resulted in pre-tax earnings declining from $2 million in the prior quarter to $1 million in Q3. These pre-tax earnings after expensing $1.3 million of Advanced Data Solutions start-up costs for Q3 and $1.7 million for the second quarter. Excluding these costs, pre-tax earnings were 11% of revenues for our Content Services business in the third quarter compared to 16% in Q2.

In the current quarter our tax expense was $136,000 or 14% of pre-tax earnings versus $400,000 or 19% in the second quarter. Getting down to net earnings, our net income for the third quarter was $1.3 million or $0.05 per diluted share compared to $2.1 million or $0.08 per diluted share in the second quarter.

I will now turn to cash flows and balance sheet. Cash generated from operations was $2.9 million this quarter compared to $2.5 million in the second quarter. Our liquidity position continues to be healthy with cash, cash equivalents and investments and total deposits with banks at $25 million at the end of Q3 compared to $23 million at the end of the second quarter. In addition, our liquidity sources included $15 million unutilized line of credit.

Let me now review our capital expenditures, working capital and our foreign exchange hedging program. We incurred capital expenditures of approximately $1.2 million in the third quarter compared to $2.4 million in the second quarter of 2012. The capital expenditures in Q3 primarily include $500,000 for assets that will be used by our Advanced Data Solutions business and $700,000 for routine CapEx. We expect our CapEx to be in the range of $1 million to $1.5 million in Q4, of which approximately 50% will be in Advanced Data Solutions business.

Looking at working capital, there was no significant change in our accounts receivable, which were $17.5 million at the end of third quarter compared to $19 million at the end of the second quarter. Our DSO, or days sales outstanding, increased marginally to 86 days in the third quarter compared to 76 days in Q3 as we experienced some procedural delay in collections from a key client. We spent the DSO to trend down in the next quarter.

Let me now review our inventory of foreign exchange hedging contracts. As of the end of the third quarter, we had outstanding foreign currency forward contracts of $25 million to hedge our foreign currency risks for our operating expenses in Asia. We have notional unrealized gains of $300,000 on these forward contracts as of September 30, 2012, which is a result of the appreciation of the value of the Philippine peso versus the US dollar combined with the offsetting impact of the depreciation of the value of the Indian rupee against the US dollar. We recognize the gains and losses on these qualified hedging contracts in our income statement as and when the contracts mature.

I will now conclude with a brief summary of Advanced Data Solutions business. Total cumulative investments inclusive of start-up operating losses until the end of September 30, 2012 is $10.2 million. Our investment in Advanced Data Solutions business is now running at the rate of $1.8 million this quarter compared to $2.3 million in Q2, of which $1.4 million will be through our income statement and $400,000 will be in CapEx. As mentioned previously, we are currently working on two contracts from which we expect to report revenues in the next quarter. I will now open the line for questions.

(Operator instructions) Vincent Colicchio, Noble Financial.

Jack or O'Neil, I'm not sure, whoever wants to respond, the IADS business -- what was the revenue in the quarter? And you mentioned you're working on two new contracts. Can you remind us how many you have in place today?

We have currently two contracts, and we expect to report revenues from these contracts in Q4. It's a still a moving piece as to what the exact amount of revenues will be because it's based on services delivered and the volumes that we get from those contracts.

Was there any revenue this quarter from the IADS business?

Very marginal. It is not significant. It was less than $50,000.

Okay, and any sense for a range of how large these two new contracts can be?

It is premature to talk in terms of the total scale. We expect that they will be a meaningful contribution in both Q1 and Q2 -- sorry -- in Q4 and Q1 of next year.

And Jack, nice job seeing your base business improve. I believe that you had a workshop this quarter with one of your large clients that helped improve momentum there. Will you do more of the same going forward? Any color there would be appreciated.

Sure, Vince, thanks for the question. We are seeing that the workshops are very effective. The workshop that I think you are referring to and may have heard about was with one of our largest historical clients. And whereas in the past, we would have regular interactions with two, maybe three executives from that company, we had two workshops -- one in Europe, one in the states -- and we built relationships with over 90 of those executives. A lot of them came back and said, wow, we never knew that you did all of those things. Can we have more discussions with you?

So I think we are onto a, if you will, a marketing tactic, a customer franchise-building opportunity that is very significant and will be important for us going forward.

And on the e-book side, as it relates to your large client, I realize visibility is -- you don't really have a sense for things for 2013 as of yet. Any color on -- do you have any expectations in terms of maintaining share with that customer as they ramp? Any color there would be helpful.

Certainly. Yes, I think that my expectation will be that we maintain share. I think that -- my impression is we've been gaining share. The issue that we face is not an issue relative to market share, but an issue relative to budgeting and forward visibility. So I think that what we need to do generally in the business is we need to stay relevant with our large customers. Their requirements change; they are not static. And we need to continually build our customer franchise.

So what we need to do, to do that? Well, in the e-book context, we need to do two things. We need to go international; and secondly, we need to go enhanced. On the international side, as I said in my remarks earlier, we have once again proven ourselves able to produce very, very high-quality work, this time in Japanese. If you think about the challenge of producing work in Japanese with a Filipino and an Indian labor force, then you probably can appreciate what a great success that is.

Beyond that, we need to go enhanced -- when you think about what the learning opportunities of the future will be, the kinds of textbooks that are going to be used, the kinds of devices that are being announced probably in real-time. Clearly, the opportunity to build enhanced interactive content at scale is going to be very valuable to our customer base.

One last question here and I will go back in the queue -- the low end of your revenue guidance for 4Q, the $18 million -- what is that based on? Is that based on customer commitments?

Yes. What we do is we sum up customer commitments and we look at late stage customer commitments and we try to handicap the whole thing and do our best crystal ball work on that. It's an art, not a science. And we are trying to be helpful to you as the investors in that regard, though.

Okay, thanks, Jack.

Timothy Clarkson.

Hey, guys, nice quarter, I wanted to ask a couple of questions, one on this issue of enhanced books. Let's say that the typical e-book would cost $100 to produce on your end, and that it sold for $10 with, I don't know, a $5 gross margin or better for the customer. What's the economic model for an enhanced book? I know there's different grades, but take an average enhanced book. What does it cost to produce, and how much is it sold for, and what kinds of gross margins are they trying to create there, typically, hypothetically?

Sure. Hypothetically, we are looking to drive gross margins that are at least as good as our existing business. The price per book will be significantly greater than the existing business, probably to the tune of 10 to 20 times that of the non-enhanced book. But as you appropriately said, there is enhanced and then there is enhanced. There is a wide range of enhancement that's possible. So with 120 books under our belt, it's probably a little premature to declare an average when the range is as great as it is. But the margins are good and we think we are aligned with where the future is going.

The notion of what we think of as a book was shaped long ago by a set of manufacturing limitations. It's paper; it's how things are bound; it's what a page looks like. Incorporating rich media and creating new types of experiences and new types of learning experiences is going to be where the future is going, and we are on the cusp of that. And we've got the right technology, people, process and customer franchise relationships in order to ride that wave.

Okay, good. One other question on your historical legacy business -- I know last time you used the expression pipeline to describe what your business was like. How would you describe the pipeline right now?

Yes, I hesitate to call it legacy business. I know what you're talking about, the existing Content Services business. Jim Lewis, our Sales VP, is proud of the fact that his pipeline has never been stronger. He believes that the marketing techniques that he is now using, most notably the technology seminars and solution workshops for clients, is driving that increase in pipeline, is now more mature. A more seasoned team that is experiencing more and more wins, is also helping to drive that, and he thinks that we are now starting to see the revenue uptake, and he's hopeful that we will continue to see that.

Okay. If and when the stock turns much lower, we are going to be back into our old buyback wrestle mode. But just throwing out -- I would argue that at $3.50 -- say, hypothetically, if it gets that low, or $3.25, that it's a better value now than when it was at $2.50 or $2.75 a year and a half ago before you started with some of these new ventures.

We are excited about the new ventures. As I said earlier and I've said for the last couple of calls, we think that our opportunity in IADS is huge. That said, it's untested. There's a lot that we still need to do there. The sales cycle is more attenuated. We are having to both evangelize and pilot things and then close opportunity, whereas when a company goes out in an RFP and knows exactly what it needs, you're just closing the business. It's a different process, but it's being received very, very well. We have put a lot in place. We have built new facilities. We have gotten our HIPAA and UK Data Protection Act compliance in place. We've got an ISO 27001 certification enterprise-wide in place; we've built a pipeline. We are doing the things we need to do to create a revenue stream that is providing better revenue visibility with less concentration. Those have been the things that have held us back in the past.

So if we can do the things that we do well, building customer franchise, creating high-quality content with, now, revenue streams that provide more visibility and less concentration, I think we've got an exciting story here.

You said before that you thought that in a reasonable period of time -- I don't know, 3 to 7 years -- that this new division could be bigger than your legacy businesses. Do you still believe that after spending time with this the last six months?

I absolutely do, and I think there are a few characteristics of it that will enable it to scale that way. One is the extent of our differentiation. The second is the extent to which we have built a product. So for our existing business, we're doing a lot of different things for a lot of different people. We are building the equivalent of bespoke suits. For our new product, we are creating suits on the rack. We have isolated, working in very close coordination with a number of charter customers. We have figured out what they need and how they can do their business better, and now we are taking on the road, and it's being received well.

So I think those characteristics will potentially enable it to be very successful in the future and quite possibly dwarf the Content Services business in terms of its scale.

Okay, I'm done, thanks.

(Operator instructions) Charlie Pine.

Thank you for the quarter. Just a few quick questions. Probably more this one would be to O'Neil. Do you expect going forward, now that since you -- it looks like the CapEx has been coming down a little bit. Is a $1 million to $1.5 million CapEx that you delineated for Q4 -- do you expect that going forward with IADS, that that is going to be a more normalized CapEx for the foreseeable future, that range?

Charlie, yes, and I think the background to that is that our routine CapEx is somewhere on the order of approximately $500,000 to $750,000 per quarter. And the Advanced Data Solutions business is running at the rate of somewhere between $400,000 to $500,000 per quarter. Until such time, obviously, we experience a ramp-up beyond our existing capacity, in which case we will need new facilities. But that should be the number for now. And the money that we are spending on Advanced Data Solutions business is just further enhancing the workflows and the platform.

Okay, moving on to the pipeline that you had discussed in the IADS segment last quarter, how would you characterize the extent of breadth in that pipeline? Have you seen a significant increase in the pipeline since we last spoke on the last call, or has the pipeline been relatively static?

I think, since the last call, most of the work that we've been doing has been moving the people in the pipeline through the sales process, so some more piloting leaning activities, moving it along. The pipeline is pretty large, right? There's probably 50 to 60 major firms in life insurance, healthcare, pharma sitting in the pipeline. We don't need more of it; what we need is to move it through. So that's really where our focus is at this point.

Jack, are you willing to give us an idea of how many people are actually -- beyond the contracts that you said that you have -- the two contracts that you said you landed, you'll start recognizing revenue from, how many of those 50, 60 are you piloting with right now?

You know, I don't have a current count. I think it's somewhere in the area of 8 to 10 at various stages of pilots, meaning that either pilots are occurring right now or pilots are slated to begin as soon as master services agreements and statements of work are signed.

And what are you finding out from what you did with those last two customers? How long are these people generally running pilots for, and do you have any sense of what the duration of these might be?

You know, I don't know that yet. The two that are in the bag -- I think those ran a course that I wouldn't necessarily extrapolate to the others. When I look at the others, I see some that take a very ponderous, thorough, slow approach. I see others that I believe will move to commitment quicker. But of course, the proof is in the pudding there.

And then, finally, just a couple of e-book-related questions. How would you characterize the general tone and direction of interest from some of the other -- you have focused a lot on this one large e-book customer. But how would you say the focus is with some of the other significant players in the space and where you stand going into Q4 and where you think that they might be the first couple quarters of next year?

Yes, we continue to see build there. There are new prospects coming in all the time. There are a couple that look particularly interesting. But I think we've focused on a major customer because its activities tend to eclipse, at least right now, a lot of the other progress that's being made there.

Okay, and the last thing on the e-books -- are you able to give us -- you said you've done 120 enhanced books. Have any of these actually -- are they actually published and available on any particular platforms as we speak?

Yes, I think they are. If you -- and I would encourage you to look at the books that are on the Inkling website. I would encourage you to look at looks that are available on iTunes and the iBookstore that are enhanced books. And off-line, I'd be happy to send you some links to specific works that I think show off very, very -- in a very compelling way what enhancement means and what books in the future are going to look like.

That would be great, I would love to get a couple of examples of some of them specifically that you would say would be your most proud of your efforts in.

Sure, happy to send that.

Okay, thank you, Jack.

(inaudible)

Jack, I was wondering with these enhanced books, where do you get involved in the book in terms of -- do you get to start off in the creative process? Where in the cycle do you get in, and what kind of work do you actually enhance the value-add to the process?

Yes. When we first started doing it, the creative process was being managed by others and we were coming in more for the technology end and the programming piece, the execution piece. And what we are seeing is that that's -- and this was always the plan; the plan was that that would change and we would start to get more involved in the implementation of the creative piece. So authors and publishers will still, and I believe will continue to want to exercise editorial control over what something looks like. But making the animation do what it can do, showing examples, being able to implement different choices within an editorial framework will become more and more our responsibility. And it has, and we are looking up to that challenge.

And on the IADS, especially on the Synodex side, I've probably asked you before, but could you help me understand the services you provide maybe by running through a typical example of what you do for these clients?

Yes. We are still flying a little bit under the radar there just in terms of being specific. And we're doing that for competitive reasons, for -- none other than that. But at a high level, what we are looking to do is to apply technology and workflow processes to solve or to address problems related to a chasm between non-digital, unstructured information and various uses of well-defined, well-structured digital records. When you look at the -- go into a doctor's office, right, and look at the way medical records look like for now and think about what uses a well structured, normalized, well-defined medical record could be put to, that's really where we are playing.

Okay, and the target client base -- is that health insurance payers, providers?

We are looking across a spectrum of different people. We are looking at health insurance, we are looking at healthcare companies, we're looking at pharma companies.

Alright, one other question on the pipeline. You talked about pipeline being -- having never been stronger, more mature and so on, and winning more deals. Are you referring more to the content and e-book business, or did you also include the healthcare and the Synodex business in that?

Sure. I think the question was directed specifically at the Content Services segment. And my response was that Jim Lewis, who heads sales and marketing for the Content Services segment, feels very strongly that the improvements that we are seeing in the pipeline are real, they are tangible and that they will be helping to propel revenues in that segment going forward. Separately, I talked about the IADS pipeline. We can't compare the IADS pipeline to any prior periods because it's new; it's a new business for us. But again, there, we feel very strongly that the pipeline is compelling.

Right, and within the Content, is that just legacy content business or e-books business?

E-books business and non-e-book business, on the Content Services side, both.

Thank you, that's all for me.

(Operator instructions) [Edwin] (inaudible).

I think you got my name wrong, but that's okay. Good morning, Jack. Nice quarter. Just a couple easy, quick questions. One relates to the enhanced services. How do you see the trend moving here, and can you keep up with the trend, or is it just going to move slowly?

Sure. If the operator got your name wrong, I would like to get it right. Can you repeat that?

Ed Fowler, Fowler.

Ed, sure, okay, thank you. Can we keep up with the trend? I think that we can. I'm very pleased with the progress that we've made in terms of -- from a technical implementation perspective, being able to work with the iBooks author package, the Inkling package, to work with the EPUB 3 enhancements. I'm pleased that we've gone from strict implementation to the creative side of implementation progressively. I see that strengthening, and I think we will be in a position to maintain that edge. We've managed to please various customer constituencies in terms of our progress there. The risk to that business, it's kind of cutting-edge. Right? There's a lot of publisher adoption that needs to take place in order for that to scale. Our job is to make sure that we are ready for that and we capture our market share of that opportunity.

At the same time, we want to become a company that has good quarter-to-quarter sequential characteristics. And that's where the IADS strategy comes in and why it's so important.

Just one other easy question with regard to your accounts receivable, it was $19 million last quarter. It's $17,499,000 as of the end of the quarter. Why doesn't this come down quicker?

O'Neil, do you want to take that?

Hi, Ed, yes. The typical cycle time between the services we provide and collection is somewhere on the order of 60-65 days. So, depending on how the revenues were in the quarter, if they were towards the end of the quarter, you will see they're fluctuating. Having said that, this particular quarter we had a procedural delay from one of our key clients. And I think that will be sorted out next quarter. And you can -- because these things are normal when our business is organized around several large customers. Does that kind of answer, or --

No, not really. They are holding back on payments to you?

It is just a procedural issue. You've got to understand; there's a cycle time. The big companies take -- after the invoices get approved and they go to the accounts payable and they get paid out. So there's absolutely no credit risk here. It's just a procedural issue and getting the disbursements.

Just to add to that, would you expect that closer to the end of the year that you'd received bigger payments on this?

Yes, we surely expect whatever delay that we experienced this quarter to get regularized in Q4.

Okay, thank you.

We have no further questions in queue at this time. I would like to turn the call back over to Mr. Jack Abuhoff. Please go ahead.

Thank you, operator. To, I guess, recap a bit, quarterly revenue was up slightly year-over-year but down from last quarter. The sequential decline is coming about primarily, as we did predict, from a major e-book platform customer dialing down its budget for books destined for the domestic market. We have made some significant progress on foreign language e-books and enhanced interactive e-books. We are coordinating these efforts are closely with our major customers. Our general content and services segment net of its largest client showed some modest growth in the quarter. I think it was 5%, to be exact. There's strong, there's growing enthusiasm among customer prospects for our Synodex healthcare and insurance businesses. We are working to make Synodex an important and sustainable growth driver going forward. And I appreciate the time you've all spent with us today and look forward to your continued interest and support. Thank you.

And this does conclude today's teleconference. You may now disconnect, and have a wonderful day.