Innodata Inc (INOD) 2013 Q1 法說會逐字稿

Good morning and welcome to the Q1 2013 Innodata Inc. Earnings Conference 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, [Lexi]. 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 quality the forward-looking statements that are made during the call. These statements are based largely on our current expectations and are subject to a numbers of risks and uncertainties including without limitations that contracts could be terminated by customers, projected or committed buy-ins of worth may not materialize.

That our Innodata Advanced Data Solutions segment has not reported any substantial to date and is subject to the risks and uncertainties of early-stage companies; the primarily at-will nature of the Company's contracts with our 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 give rise to requirements for digital content and professional services and knowledge processing; difficulty in integrating and driving 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. We undertake no obligation to update forward-looking information and actual results may differ materially.

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

Thank you, Amy. Good morning, everyone. Thank you for joining us. I will review our first quarter 2013 results and update you on our strategic progress and what we will be working on in 2013.

Revenue in the first quarter was $15.9 million, an 11% decline from our fourth quarter, consistent with our guidance that we provided in our last earnings call. This decline was a result of lower revenues in the quarter from three of our five largest clients and a few of our smaller clients as we completed certain projects for them.

As a result of this decline, our pretax earnings and our content services segment fell from 10% of segment revenue to 5% of segment revenue. This kind of quarter-to-quarter revenue volatility is characteristic of our content services business which is project-driven.

In late 2011 we began investing in building new business lines that would give rise to recurring revenue as opposed to project revenue. We formed our IADS division specifically to incubate these new business lines.

Notwithstanding this quarter's revenue decline, we maintained investment IADS segment $1.1 million that of revenues in the quarter. The Synodex division of IADS first major contract with them. That to the contract value of $1.4 million with a highly regarded Fortune 1000 company.

Though somewhat modest in size compared to other opportunities we're chasing in Synodex, the contract was important because it provides us with solid market validation for our innovative approach to help records analysis.

We've been getting encouraging feedback from the market ever since we began showing our capabilities in Q4. There's nothing like market endorsement that come with the first signed contract.

We continue to make it good progress building and cultivating our pipeline of client prospects in Synodex. Two, we are expecting to pilot with another 10 companies for our core product and seven companies for our Synodex connect platform.

Our active prospect list includes several of the largest insurance and reinsurance companies in the world. The sales cycle is proving to be more protractive than we anticipated when we first started marketing our capabilities.

Notwithstanding our prospective clients' enthusiasm, we see that they are evaluating the impact our capabilities can have a within their business is with great deliberation and analytical resolve.

Therefore the measure of our progress on a client by client bases, namely, are we still in the game. Are we continuing to advance the ball down the field? Is the client prospect increasing its own investment in exploring our services? Based on these measures, our optimism is continuing to run hide and we're continuing to invest.

As a reminder, we now have to services that we are marketing to life insurance companies to our Synodex division. The first enables life insurance carriers to more effectively the medical records in their underwriting processes.

The second enables of life insurance producers which I mean brokers and agents to connect and communicate more effectively with life insurance carriers to place applications.

At the heart of both of these technology enabled services, are core competencies and digital content management and information extraction.

Our value proposition include underwriting efficiency, accuracy, and speed, and providing data mining opportunities for actuaries seeking to drive better risk allocation and create more profitable products.

It is our intention to become an integral part of the life application and underwriting process. Beyond insurance, we see applicability for our core technology in several other sectors which we also intend to explore this year. We believe that the addressable market for our service is it likely well in excess of $1 billion will of potential services.

I will return now to our core business represented by our content services segment. As I said a few minutes ago, that segment continues to be characterized by lumpiness of revenue principally due to it being largely a project based business and we saw the downside of this in the first quarter.

Until IADS becomes a significant contributor of recurring revenue, I expect this lumpiness will continue. Ebs will likely be followed by flows and flows will likely be followed by ebs. It's the nature of the underlying business.

Despite the statements revenue downstream, we made some progress on a couple of strategic fronts. We helped a major customer successfully launch its Japanese e-book store successfully delivering many thousands of Japanese and language titles for its launch inventory.

On the heels of this success, also in the first quarter, we launched our direct to publishers in Japan. To date, this has resulted in two signed SOWs, 12 late stage proposals, and another 20 or so and new customer prospects in our pipeline.

We think the trend of major digital retailers launching localized and e-book distributions stores would gain momentum in 2013. We will benefit by being well-positioned to help our major clients create local language inventory. And by further leveraging this and to providing services directly to publishers in [these] markets.

In the first quarter, we also continued to progress hands and interactive e-book capabilities producing iPad destined e-books which provide whole new reader experiences. E-book still with lots of multimedia as well as guided tours, (inaudible) exhibits, high-definition video, and interactive experiences.

In the first quarter, we completed other 46 titles bringing our total portfolio to approximately 170 enhanced and interactive e-books. We expect that our work with Apple as well [Incline] a San Francisco startup founded by an executive from Apple's education division will continue to enable us to expand our capabilities and portfolio in this area.

We've begun 2013 six strategic priorities and will briefly outline for you. One, signing multiple multi-year deals for life insurance companies for the core Synodex service offering.

Two, bringing insurance brokers and agents on to our Synodex connect service. Three, continuing to expand our foreign language e-book capabilities to support global expansion of leading e-book retailers. Four, launching the new e-book related services for international markets. Five, continuing to promote technology innovation within our key content services clients and driving progressively deeper relationships. Six, exploring acquisitions that support our e-publishing or Synodex strategies.

We will update you on our progress on the strategic priorities through the course of the year.

Looking out to the second quarter, we expect revenue to be in the range of $15.5 million to $70 million and for our IADS investment to also can you at approximately the same level as in Q1.

We have the $2 million buyback authorization from our board in place. We are very confident in Innodata's future and believe strongly that repurchasing our shares represents an attractive proposition for Innodata.

In proceeding with our buyback, we will be mindful of our US working capital needs in light of the fact that the cash we hold offshore is not available for US working capital or buybacks without incurring additional income tax. We will issue a press release when we recommence our buyback.

I will now turn the call over to O'Neil who will provide additional insight into our financial results. After that, we'll take your questions and then I will wrap up with 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 2013.

I will be reviewing our first quarter results with you by comparing performance to the fourth quarter of 2012 on a sequential basis. Along the way, I will share my insights. Our total revenues were $16.9 million in the first quarter 2013 compared to $19 million in Q4 2012.

The decrease of $2.1 million was attributable to a $350,000 decline in revenues of from a key client and our e-book business combined with a $1.9 million decrease from our other customers with our content services business. This decline was partially offset by higher revenues of $200,000 in our Advanced Data Solutions business.

Total revenues in content services were $16.3 million this quarter compared to $18.5 million in Q4 2012 and revenues in our Advanced Data Solutions business increased from $450,000 in Q4 2012 to $650,000 in the first quarter.

Revenues from our top three client amounted to 42% of revenues in the first quarter compared to 40% in Q4 2012. Our gross margin was 24% of revenues in the first quarter compared to 31% in Q4 2012.

In dollar terms, our total gross margin was $4.1 million this quarter compared to $5.9 million in the last quarter, a decline of $1.8 million or 30% which essentially reflects the impact of lower revenues without a proportionate reduction in labor costs.

This gross margin is after taking into account a $350,000 of expenses, net of revenues incurred for our Advanced Data Solutions business.

The gross margin in our content services business was 27% of revenues in the first quarter compared to 34% in Q4 2012. Our selling, general, and administrative expenses were $4.6 million in Q1 compared to $5.4 million previous quarter, a decline of $800,000.

Our expenses were lowered due to seasonal factors and decisions made in Q4 2012 to reduce our cost. Cash G&A expenses as a percentage of revenues was 27% this quarter compared to 28% in the last quarter.

On a segment basis SG&A expenses were $750,000 in Advanced Data Solution business for both the sequential quarters, and in content services it was $3.9 million this quarter compared to $4.7 million in the previous quarter.

In Q4 2012, we had taken a $500,000 impairment charge for completely writing down the assets and the acquisition cost of docGenix. There were no such charges this quarter.

Moving down to pretax earnings, our pretax loss in Q1 was $400,000 compared to earnings before taxes of $100,000 in Q4 2012. After ignoring the impact of docGenix impairment charge we had in Q4 2012, the decline in earnings before tax was primarily due to $1.8 billion decrease in gross margins which was offset by lower SG&A expenses of $800,000. These pretax results are after absorbing continuing cost of $1.1 million net of revenues for this quarter and $2.1 million in the previous quarter building the Advanced Data Solutions business.

If we exclude these costs, pretax earnings by $700,000 or 5% of revenues for our content services business in Q1 down from $1.8 million or 10% in Q4 2012.

In the current quarter, we had a net tax benefit of about $500,000 compared to a net tax benefit of $300,000 in Q4 2012. The tax benefit is primarily an account of deferred tax assets created in our books as a result of the pretax loss incurred in our US entity.

On the basis of 10% pretax profit, we estimate our effective tax rate to be in the range of 20% to 25% of pretax earnings.

That earnings in Q1 2013 after minority interest were $300,000 or $0.01 per diluted share compared to income of $700,000 or $0.03 per diluted share in the fourth quarter of 2012.

Our printed financial results for Q1 2013, though in line with guidance, are disappointing essentially reflecting the negative impact of unpredictable volume fluctuation and lumpy project type of revenues and our content services business combined with an income statement impact of our continuing investments to build the IADS business.

The solution to having predictable financial results is growing our IADS business which had the potential to produce a more predictable revenues on a quarter over quarter basis.

As Jack mentioned, we are pleased with this quarter. We signed our first major contract with a large insurance company. This is our first deal that will involve using the full scope of Synodex platform.

This is an important first endorsement of our Synodex offering. Our next goal is to exceed client expectations on this contract and convert other pilots into customer relationships. As I said in the previous quarterly call, during this scale of transformation, investors will have to assess our long-term prospects versus our near-term challenges.

I will now turn to our cash flows and balance sheet. Cash generated from operations was $3.8 million this quarter compared to $4.1 million in the fourth quarter of 2012.

Our liquidity position remains healthy with cash, cash equivalents, and investments in term deposits with banks at $31 million at the end of Q1 compared to $28 million at the end of December 31, 2012. In addition, our liquidity sources included $15 million line of credit which had so far remained unutilized.

Let me know review our capital expenditures, working capital, and our foreign exchange hedging program. We currently capital expenditures of approximately $1.6 million in the first quarter of 2013 compared to $1.2 million in the fourth quarter of 2012.

The capital expenditures in Q1 primarily includes $300,000 for assets that will be utilized by our Advanced Data Solutions business and $1.3 million for CapEx in our content services business.

CapEx in our content services business was relatively high this quarter because we spent approximately $800,000 on replacing and upgrading our network service in Asia which are typically replaced after four to five years.

We expect our CapEx be in the range of $1 million to $1.5 million in the second quarter of 2013 of which approximately $500,000 will be for the Advanced Data Solutions business.

Looking at working capital, our accounts receivable declined to approximately $10 million at the first quarter from $14 million at the end of the fourth quarter 2012.

Our DSO or day sales outstanding 166 days first quarter compared to 78 days in Q4. This change is primarily on account of the timing of payments of past due balances by one of our key customers.

Let me know review our inventory of foreign exchange hedging contracts. As of the end of the first quarter, we had outstanding foreign currency forward contracts of the $32 million to hedge the poor and the exposure for our operating expenses in Asia.

We have notional unrealized gains of $100,000 on these forward contracts as of March 31, 2013. Any final gains or losses on these qualified hedging contracts will be recognized in our income statement upon the majority of the contracts.

I will now conclude with a brief summary of the Advanced Data Solutions business. During the quarter, we increased our ownership interest in Synodex from 70% to 85%. Total investment includes operating losses during the first quarter 2013 was $2 million of which $1.7 million was for the income statement and $300,000 a representative capital expenditures.

In the first quarter 2013, we owned the revenues of $650,000 and more importantly we signed our first major Synodex contract with a two-year contract value of $1.4 million.

Our current run rate of investments is approximately $1.5 million to $2 million per quarter of which approximately 75% is through our income statement and the balance, 25%, it's in CapEx.

I will now open the line for questions.

Thank you. (Operator Instructions).

We'll take our first question from Vince Colicchio with Noble Financial.

Good morning, guys. Jack, I apologize if I missed this, but what was your e-book revenue in the quarter and could you breakdown that your e-book revenue in terms of foreign language and interactive revenue versus a more traditional revenue?

We will be able to provide some help with the e-book revenue -- O'Neil, do you have a number --

Sure. Hi, Vince. The e-book revenues for the quarter was 22% of total revenues.

I don't know that we've got a foreign language and breakdown from that but a lot of it is starting to become foreign language.

That's right.

And the foreign language and interactive, on those two areas on the e-book side higher margin than other revenue?

I think the foreign language right now is about the same. Interactive is a little bit higher. From a percentage of revenue perspective, there's very little interactive in there at this point. We do see that as being a growth area though.

Could you talk to your relationship with your e-book platform clients in terms of are you maintaining share, are you growing share with them, and what do you expect for the rest of the year?

Sure. In terms of our platform clients and our major publisher clients who were supplying us with the volume of work, we're maintaining, we're growing our relationship with our major client and that is certainly the case.

We had it -- I can't think of one client who is a small player in the field and is exiting and is changing some factors. That might be one exception but in terms of the core platform players and the large publishers across the board we're doing very, very well with them.

Shifting gears to the IADS side, how many pilots do you have in place now? We went to that. I have a bad connection and I couldn't hear that. And also if you can comment on it you had mentioned potential acquisitions related to Synodex, can you give us a little more color in terms of that? Have you identified potential deals, et cetera?

Sure. In terms of the pilot in Q2, we are currently looking at 10 pilots that are scheduled for the core service and seven on Synodex connect. Now when I say that they are scheduled they are forecasted. Some of those could let a little bit but that's the volume of activity that we're currently looking at for future.

On the acquisition side, what we're looking at is a supply-chain of activities that takes place on either side of the offering that we've got. So there are things that are from a supply chain perspective, vertical integration perspective that take place earlier with information. We are looking at opportunities in there.

And then there are also possibilities in terms of how that kind of information that we create that's integrated and utilized within a carrier. And we are looking at opportunities on that side as well.

That said, I also remarked that we're looking at acquisitions in publishing space. We're probably a little bit further along in that area. We've got several things at any point in time that we are evaluating. Of course we are going to be very careful and very deliberate in the choices that we make our kind.

And just to add to what Jack said that are business plan is not predicated on making these acquisitions. So we're going to be very disciplined and if they fall into is that characteristics that we are looking at and help us to accelerate our business plan and then we will be looking at them.

And then, Jack, on the IADS side, a large and this one client -- could you give us some color in terms of how large of that piece of business could ultimately and any thoughts you have on that.

Well, I think when we look at the clients across the board, as I said earlier, with the client that we are piloting, that includes some of the largest insurance companies in the world and the opportunity in terms of individually within those clients is potentially very, very significant.

Again, potential opportunities of tens of millions of dollars in several of those clients. I don't expect that we will be signing contracts that large. I think what will happen is we will get a scope of work and we will be successful with that and we will roll out from there.

But importantly, what I see is great growth potential within that. It's a new market for us. It's an expanded market and I we've got something that is being perceived as differentiating and really enable them to do business more effectively.

Okay. I'll go back in queue. Thanks, guys.

Thank you, Vince.

We'll take our next question from Joe First with First Associates.

Good morning, gentlemen. I had a question similar to the previous about the size of potential orders in this new segment of business. The customer you got is $1.4 million over a couple of years which is a little less than $200,000 a quarter.

Well, over the last year, you've been losing revenue at the rate of an average of $2 million a quarter. So it would take 10 of these this size customer just to make up what you've been losing. And you sort of indicated that the potential customers here could be much larger than the first one.

I assume that the first one is relatively small because it's a smaller insurance company and smaller insurance companies can make decisions faster than larger, but could you comment on that and be a little more specific? Thanks.

Sure. I think one of the benefits -- the clear benefit that we see in the IADS business is that we're building differentiated products for larger markets that will result in recurring revenue and we recognize as clearly as I know you do Joe, that one of the deficiencies in our existing business is the lack of revenue visibility and the uneven performance.

Now as much as we know that we can sit here and not do this new development and not make this reinvestment and new projects will come, it will continue to be an even. So I think what we are going to be accomplishing this investment is demonstrating that we can change the course that the business is following. We can change that fundamental weakness in the business which is visibility and unevenness.

We see it as being a large market and we see that adjacent market that will be able to benefit from the same technology. Moreover, we are successful proactively developing something that differentiating there and building upon our ability to help companies with digital enablement and perform more effectively through digital enablement. There are other sectors where we can do the same thing.

So we are very, very focused on that. We believe that it will be important growth driver going forward, and most importantly, it will be sustainable, visible, forecastable growth.

Okay. Apparently, I didn't ask my question very well. The other potential customers, are they -- could you significantly larger than the one you already got?

Sure. Yes. We have clients in the pipeline would be significantly larger.

Okay. Thank you.

And, Joe, just to add a little bit more to what Jack said, when you are comparing the revenue decline in the previous quarters and what we are trying to do with the Synodex, and in terms of the business model, you've got to recognize that the e-book revenues are essentially nonrecurring in nature of the relationship is an enduring long-term relationship our revenues are essentially right producing the e-book titles for the myths which are being made by large e-book retailers primarily.

So the predictability is essentially project-based. They get X thousand titles in the order we produce them, turn them around, and we recognize revenues.

In the case of a Synodex, though a contract could be a two-year contract for a three-year contract, but we are locked into the value network of underwriting insurance policies so it is essentially recording in nature.

So while I understand the implication mathematically look at 10 of these contracts or 15 of these contracts which is a far more doable business in terms of predictability of revenues.

Thanks. I appreciate that and I'm really glad you're doing this because that's what you need to do is the other nature of business must drive you nuts as much it does us. So that's great that you are doing it.

One other question to clarify about stock buyback. It was a little confusing. I thought you said you think you are stocks were good and you might buy it back then you said but we have a lot of cash outside the country and you can use that without tax implications. How much cash do you have inside the country that you can use words that?

Joe, on an average, then you cash balances could swing from a range of 5% to about 25% of our total cash balances. I'm giving a range because it is all dependent on the timing of payment that we get from our customers and the obligations to pay our Asian subsidiaries within a certain period of time.

For example, at the end of the last quarter which we disclosed in our 10K, the cash balance was approximately 10% in the US and 90% was overseas. At the end of this quarter, it is going to be higher but that is a purely timing issue because we have to pay the Asian subsidiaries within the next 30 to 60 days.

And I think, just to add color to that so that the investors clearly understands, as in when the IADS business takes off, that will have an incremental positive impact on our US cash balances because right now the investments we are making are essentially running in the form of operating expenses running into our income statements. That means we pay for those operating expenses to the Asian subsidiaries.

So as we start leveraging those operating expenses with new revenues, those in new revenues will essentially go to increasing our US cash balances. I hope I'm making myself clear.

No problem. That's much clearer. Thank you. I'll go back in queue. Thanks.

will take our next question from Tim Clarkson with Van Clemens & Company.

Hi, Jack. Hi, O'Neil. Good to hear you. The question I have is that you talked about now that insurance IADS business that will have an additional service of broker and could you just explain what the utility more value of that service would be to brokers?

Sure, Tim. I'll paint a little bit and I ask for your indulgence in waiting until we get it off the ground a little bit more than it is now things will feel comfortable from a competitive perspective in terms of going into a lot more detail.

Really what we're looking at is the relative efficiency and cost application producers, brokers and agents, and VGAs placing policies and getting bids from policies from the Company that right insurance policy. We are looking at ways we can create greater efficiency within that process.

I spoke about a pilot that we are likely to do in this quarter group of people operating on that platform and those seven companies will be a part of that platform that will be working together demonstrating and experimenting with that efficiency that can come from doing their business over this platform.

So we are obviously very excited about it and more importantly, they are obviously very excited about it and as we get that pilot under our belts, no doubt we will need to do some further customization around the platform to make it better and better with the way they are looking for it to work.

But we think that from there it can expand and as it does, and as we get it off the ground we will provide details on directly how it is working.

All right. Getting back to the more traditional IADS offering you have insurance companies, what is the main benefit that the insurance companies are seeing by potentially the one that took on the service and the ones that are considering taking on the service?

I think there are several benefits. One of the big benefits is efficiency. They are able to process information by using our service. They are also seeing great benefit in quality. Quality of information that they are getting is much better than the information they may get from a competitive product and better information than they are able to produce economically internally.

So that's the initial benefit they are seeing. What they are also seeing the ancillary benefits in terms of the quality of their underwriting and the quality of their data mining that they will be able to do as a result of that.

Have you been able to essentially prove it just in terms of cost effectiveness that they can save money by doing this?

We have. We have clients who piloted us and shared with us the benefits that they are experiencing. We recently were told by one client that they were able to do easily three times as much work with their current investment. And importantly they and we see opportunities to increase it even beyond that.

So I think in this economy efficiency and the ability to do more with less is great. You can get attention, you can get traction that way and then having the ability to demonstrate benefits that go well beyond that in terms of quality, ultimately revenue production, data mining opportunities to become progressively more selective and create new products. Those are tremendous icing on the cake.

Going back that business, in terms of I know that there has been a lull between the big surge in English books and now doing the international book, what's your belief about later on in the year? Is there potential for that international book business to pick up?

I think there is. It's unpredictable though. So when we look at the opportunities we see there are countries, there are languages. As you know, we've done a lot in terms of expanding our language capabilities that we were able to become experts in processing and creating Japanese e-books. I think that's a testament to the quality of talent we've got here and it has enabled us to further create even stronger relationships with our key client through that success.

So I see that continuing to expand. I see more languages, more countries coming. And then I think another opportunity that exists for us like I also mentioned in the call is it to take the opportunity to rise in the wake of those launches and those successes and to build relationships directly with content producers and publishers in those countries, and to essentially help them by becoming that their digital partners.

From a strategic perspective, I think it's exciting. From a timing perspective, it's much less within our control then we want business to be generally speaking. Again, highlighting the importance of the IADS investment.

Right. In terms of the rich media, it still obviously a small part of your business, but what are the features within rich media that seem to be taking off? Is it the video? Is it audio? Is it interactivity? It's it chat? What are the things they are building into the rich media and interactive books?

I think there's a combination of things. There are several markets. I think it's a last feature specific, lessor whether it's read aloud or animation or a particular type of activity and then it is markets. So I think there's a lot of experimentation going on now around which market will get the most traction. You've got several ranging from corporate learning to textbook publishing to illustrated books.

I think we're trying to do is play in each of those markets and to play in a way where again, we are known of for the ability to mass manufacture very high levels of quality and then we're also known for our ability to innovate and create innovative opportunities for the kind of interaction the platform enables.

Okay. I'm good. Thanks.

Thank you.

We will take our next question from [Charlie Pine] with Van Clemens & Company.

Good morning.

Good morning Charlie. Thanks for joining.

Pretty much just two questions. Back on the e-book topic, it sounds like if I am understanding this correctly, sort of parsing a little bit of your language, your so-called major customer you haven't just proved it out now on the under capabilities on the foreign language side it but you've actually got in order from the customer and are fulfilling on that order.

Could you characterize the scoping of that particular Japanese e-book contract versus the prior size of the amount of business that you are getting from the customer when you are doing English language books?

Sure. We continue to do work in English and Japanese with our client. I think the relative amount of work that there was in order to hit a milestone which was launched in the Japanese market for us was a smaller than the US market.

There are other markets that I expect we are going to be participating in as well. In terms of giving more exact numbers, I am precluded by NDA from going into much more detail there. I hope that's helpful.

Are they giving you at this point what you would define as material amounts of work?

Yes, absolutely.

And do you see that material amount of work expanding with them over the next quarter or two in the Japanese side or do you think it's just going to be relatively steady state from where it was in Q1?

Very hard to say. I think that our job where we define it is we want to become progressively more relevant. We are going to do that through doing things like we did last year and doing things like we did in the first quarter; helping people launch products and in this case, launch bookstores and it doing it at large-scale and doing it at very high levels of quality that earn us very positive kudos at the end of those activities.

We believe that forming strategic relationships with important brands is going to be an important part of our success. Moreover, by virtue of those successes, we get to talk about new things and new conversations whether those are a new territories or the languages or new capabilities in books, and we think that a lot of success can come from that.

What is the next foreign language bookstore that you anticipate that you would be providing your services for?

I'm not at liberty to share that unfortunately.

My last question has to do with your statement on the IADS segments and I guess Synodex in particular where you described the addressable market now as being $1 billion a year. I imagine that that's what you were referring to as $1 billion year opportunity. I seem to recall and the fairly recent past you'd had been characterizing this as around $500 million a year addressable market. Can you tell me how this all of a sudden went from $500 million to $1 billion a year?

Sure. We took the information about the US market with some successes and now in terms of highlighting a UK companies, we added at that market share to the US. We also looked at outside of life and included disability where we are also piloting.

Just to dig a little deeper, what did you scope and what is that number really based on?

It was based on published information and that we were able to find about the numbers of the life policies and then disability policies that are written annually in the US and to the approximation of the life policies that we were able to, through some antidotal conversation, put together for the UK.

Is there some number out there that you are working with that is sort of an average cost per policy in underwriting costs that you are using and cranking into an equation?

Know there's not because our billings are not dependent upon or driven by the amount of cover. It's more the complexity of the case. So even if we had the numbers, which I'm sure we could find, on the amount of cover, I don't think that would be indicative of our particular economic opportunity.

So instead, what we are looking at is the numbers of policies and an approximation of the different of our product that would be applicable to different kinds of policies and then we are taking our approximate price point per policy and doing math around that.

Okay. All right. Thank you.

Thank you.

We'll take our next question from George Melas from MKH Management.

Good morning Jack and O'Neil. Thanks for the financial disclosures. I think they are helpful for us to understand the two businesses. I'd like to focus a little bit on the traditional content services. It seems like we've had a meaningful drop in revenue gross margin drop as well.

The incremental EBIT margin and clearly now you've pulled them back. So could you talk a little bit about what's going on in that business? I know it's lumpy, but it seems that it's not to just lumpy, it seems like it's declining and it seems like your guidance for the next quarter would suggest a further decline.

Sure. Thank you. Well if you take the content services business and you strip out the e-book which we know will be especially lumpy, I think what we see is that we've been locked into the $14 million to $15 million range per quarter for quite some time and that's frustrating us. Within that $14 million to $15 million, about $10 million is arguably recurring business.

So we are succeeding at replacing $4 million or $5 million of project related business. What we want to do of course is more than that. We want to grow. The challenge I think in terms of growing is obviously one that that we haven't solved yet and in part, that's inspiring us to make investments in other sectors.

The core segment of the market that we are addressing in terms of content services are again apart from e-books and e-book distribution is the information industry. The information industry has over the past couple years not been growing as quickly as it was several years ago.

But what we are looking to do is find ways that we can grow into some of the needs of that they've got so that we do see early success through things that we are doing with some of our core customers especially on the technology side.

So we see that as we replace projects because again, the $14 million for the $15 million there is about a $5 million per quarter replacement in there, a lot of the complexion that that work has changed.

It's become a little more sophisticated. It's become more technology enabled. That's enabled us to significantly increase over the past couple of years of the margin that we are obtaining on that $14 million or $15 million business.

That's good, but the frustration is not being able to grow it past that glass ceiling. It's something we worry a lot about and think a lot about.

The emphasis is going to be to manage our costs relative to that opportunity and be very selective and take the things that appear to be working and appear to be enabling us to transform the nature of the some of that business and do more of that.

We see that we've done a good job of broadening the relationship with certain of our key customers and becoming more integral to certain of their technology enabled products and visions. We think that's an opportunity and we are going to continue to experiment.

We are going to continue to be very vigorous in terms of how we choose how much investment to make, what's the nature of the investment, what's working, what's not working. We will make changes quickly as we calibrate that, but it's an important part of our business.

We have a very good relationships there. We have very good reputation there and we are intent on figuring out how to become not just better margin producing but more growth enabled within that.

But it seems that I think the margin in that business did improve and now has actually gone back to I think it was 27% this quarter and did two years ago, when you had a roughly similar revenue levels, the margins were actually higher.

And the second question there is is your investment in that business has gone down and I'm just wondering if that reflects -- maybe it reflects what you're saying about being more selective but it doesn't give much confidence that that business can actually grow. And maybe you can address the gross margin first.

Yes, out there are a lot of factors that come into play in terms of margins, so when I'm thinking about opportunity, I'm very much focused and not on a portfolio level but I'm focused on the kinds of businesses we are winning in the incremental margins were getting on new projects. So I'm looking for that to increase.

In terms of the general sense of how we are allocating investment dollars, right now we do see more opportunity as evidenced by our a very rapidly developing pipeline, more opportunity on the IADS side. So it's not that we don't see the opportunity on the content services, we see opportunity, but we are putting a lot of our dollars in terms of the IADS work.

Okay, great. And then a quick final question on the non-major customer e-book business. It seems that it declined in this quarter. It had been increasing very steadily. And that decline, is there a particular -- did something happen? Was there a project that was not renewed?

I don't think that was a within our e-book business. I think that that's in the general content services business. And like I said before, there are projects that start, there are projects that end. There was no business that walked away from us. We didn't lose market share or anything like that. It was just a natural cycle of projects.

Okay, great. Thank you very much, Jack.

Thanks, George.

And once again it is star one to ask a question. We will go next to Perry Highland with Rubicon Wealth Advisors.

Hello. Just one quick question. What are your general ideas for the second half and rest of the year and maybe going into 2014?

Perry, it's such a good question and I'm confident that as the Synodex business comes off the ground a year and two years from now when you ask a question, and we're going to be able to give you two and three year guidance. That's my dream.

Right now, we struggle with the fact that we don't have the visibility we want to and that's why again to reiterate, where making investments we are in the business and taken a direction that we want to.

So right now, we're going to go out a quarter. We do not have good visibility from our pipeline or from our major customers in order to give you better guidance than that at this point.

Okay. And then the customers are you are working with, those I would guess you could probably pick up or get an order, additional orders at almost any time from where you are with the various companies you're working with?

Absolutely. And I guess to the extent there's a double edge sword to the lack of visibility; that is the other side of it. It can come at any time. That remains to be the case. Relationships are good. The discussions are taking place all the time. And that there are things that are on the horizon, but timing is a challenge.

Okay, thank you very much.

Thank you.

And once again, it's star one to ask a question. And it appears there are no further questions in the queue.

Thank you, operator.

Just to recap, slightly quarterly revenue was down sequentially. That we anticipated due to projects that completed in Q4. We signed and announced our first major Synodex contract and though it's modest in amount compared to other things we are chasing in the Synodex business, we are very enthusiastic about the market validation that this early win provides.

We're working to make Synodex an important, sustainable growth driver going forward. We believe that it will enable us to drive high-quality revenue which over time will even out to the kinds of revenue ups and downs that we are seeing this quarter and help us transform our business to grow more predictably and steadily.

We're working hard at other areas of the business too including content services notwithstanding our frustration of $14 million to $15 million issue that we talked about. We continue to be very excited about international expansion and enhanced e-books on the e-book side.

And with that said, again, thank you everybody for joining us today and thank you for the continued support.

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