Innodata Inc (INOD) 2013 Q4 法說會逐字稿

Good day, everyone, and welcome to the Innodata fourth-quarter and fiscal year 2013 conference call. Just a reminder: today's conference is being recorded. For opening remarks and introductions, I will turn the call over to Amy Agress. Please go ahead.

Thank you, Debbie. Good morning, everyone. Thank you 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 O'Neil first, who provide a detailed review of our results for both the fourth quarter and the 12 months ended December 31, 2013. And then Jack will follow with additional perspective about the business. We'll then take your questions.

First let me qualify the forward-looking statements that are made during the call. These statements are based partially on our current expectations and are subject to a number of risks and uncertainties, including, without limitation, the matters relating to our Innodata advanced data solutions segment that are discussed during the call and the risks and uncertainties of early-stage companies generally; the risks that contracts could be terminated by customers; projected or committed volumes of work may not materialize; the primarily at-will nature of our contracts with our customers and the ability of our customers to reduce, delay, or cancel projects; continuing content services segment revenue concentration and the limited number of customers; continuing content services segment reliance on project-based work; inability to replace projects that are completed, canceled, or reduced; 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. We undertake no obligation to update forward-looking information, and actual results could differ materially.

Thank you. I will now turn over the call to O'Neil.

Thank you, Amy. Good morning, everyone. Thank you once again for joining us today to review our financial results for the fourth quarter and fiscal 2013. Before I get down to reviewing our fourth-quarter performance, I'm going to briefly review our full-year 2013 performance and share some key financial insights.

Our revenues in fiscal 2013 were $64 million compared to $87 million in fiscal 2012. This expected decline was primarily attributable to a decline in e-book revenues from a key customer, and this underscores our big challenge with project-type business and the occasional large black swan engagements. These projects are great when we are scaling up and create value from operating leverage, but we feel the pain when they are ramping down. FY 2013 was a down part of that cycle.

As most of you know, we are trying to address this challenge by investing in IADS business, with the goal of generating more predictable and recurring revenues. Jack will cover more on IADS in his presentation.

Getting back to our fiscal 2013 performance, content services was the main contributor to our top line with $63 million in revenues. Gross margins in this segment were 30% and operating margins were 7% compared to 38% and 15%, respectively, in fiscal 2012. The primary reason gross and operating margins declined as a percentage of revenues was due to lower e-book revenues and the negative impact of operating leverage.

That said, we significantly strengthened our CS business in 2013 for its existing scale of approximately $60 million in revenues, which now contributes gross margins in the range of 30% to 32% and operating margins in the range of 7% to 10%. This becomes very clear when we compare the results with FY 2010, when CS business had $61.5 million of revenues with 23% gross margins and an operating loss of 2%.

What has changed to make this difference? There are basically two key factors: a combination of our strong focus on more value-added work, pricing discipline, and including more technology at the production level helped to drive an improvement in gross margin by 8 percentage points over this three-year period.

And the second reason was that we have enjoyed a favorable exchange rate environment as US dollar has gained against the Indian rupee over the past three years, though this has been partially offset by losses on our forward covers and salary inflation in Asia. Taken together, these factors are helping pull our gross margins from 23% in FY 2010 to 30% in FY 2013, and this improvement has gone straight to enhancing our operating margins.

Now let me review the IADS business for fiscal 2013. Revenues were $1.1 million, and we incurred gestational losses of $11.8 million. This loss includes taking a $5.5 million impairment charge to write down the value of all Synodex capital assets. The comparable fiscal 2012 numbers were revenues of $1.2 million and $6.3 million in gestational losses, of which $500,000 was attributable to an impairment charge relating to docGenix assets.

Taking both CapEx and net operating expenses, we invested a total of $8.3 million in IADS during 2013 compared to $11.3 million in FY 2012. Jack will share with you the progress we are making in breaking into the market for private side digital information and to achieve our aspirations of building a higher margin, more predictable business.

Now let me review the consolidated numbers for fiscal 2013. On a consolidated basis, $4.4 million in earnings before taxes in our content services business was dragged down by an $11.8 million loss in our IADS business, which included the $5.5 million impairment charge I discussed earlier. The next pretax loss in 2013 was $7.4 million compared to a pretax profit of $6.9 million in fiscal 2012. The pretax earnings in 2012 were driven by $13.2 million operating profits in our CS business, which was offset by $6.3 million loss on IADS.

Now let me review the fourth-quarter financial results, which I will do by comparing them with the third quarter on a sequential basis. Our total revenues in the fourth quarter 2013 were $15.4 million compared to $15.7 million in the third quarter. The decrease of $300,000 was attributable primarily to a $700,000 decrease in revenues from a key e-book client, which was offset by $400,000 increase in revenues from other clients.

On a segment basis, total revenues in content services were $15.2 million this quarter compared to $15.6 million in Q3. And total revenues in our advanced data solutions business were $200,000 in this quarter compared to $100,000 in Q3.

The revenues from our top three clients was 43% of total revenue this quarter compared to 42% in Q3. Looking ahead, our revenue guidance for Q1 2014 is between $13.5 million and $15.5 million. We anticipate our Q1 revenues to trend lower than our Q4 revenues, as we have been asked to put on hold a couple of projects with a total annual value of $5 million by one of our top five clients due to client's budgetary constraints. This client I'm referring to is not the e-books client.

Let me now review our gross margins. On a consolidated basis, gross margins in Q4 were $4.5 million or 29% of revenues compared to $3.8 million or 24% of revenues in Q3, an increase of $750,000. This increase in gross margin was primarily a result of cost efficiencies, including a one-time gain of about $200,000 from a reversal in accruals for retirement benefits for lower headcount in Asia.

On a segment basis, Q4 gross margins in our content services business was $5.6 million or 37% of revenues compared to $5 million or 32% of revenues in the third quarter. And in IADS, the cost of production not covered by revenues amounted to $1.1 million this quarter compared to $1.2 million last quarter.

Our selling, general, and administrative expenses were approximately $4.4 million or 29% of revenues in Q4 compared to $4 million or 24% of revenues in the previous quarter, an increase of approximately $400,000. These expenses were higher primarily due to seasonal factors and year-end adjustments, including a one-time expense of $75,000 that we incurred to assist our employees impacted by typhoon and earthquake in the Philippines.

Moving down to pretax earnings, for an apples-to-apples comparison, I'm going to provide the figures before Synodex impairment expense of $5.5 million. Our pretax profit in Q4 was $170,000 compared to a $160,000 pretax loss in Q3. This improvement in performance was due to an increase in gross margins of $750,000, which was offset by an increase in SG&A expenses of $400,000.

This pretax profit for Q4 is after absorbing $1.5 million of IADS gestational losses. If we were to exclude IADS costs, pretax earnings in our content services business would be $1.7 million or 11% of revenues compared to $1.5 million or 9% of revenues in the prior quarter.

In the current quarter, we had a net tax benefit of $360,000 compared to a charge of $7.3 million in Q3. The net tax benefit in Q4 is primarily the result of re-computing 2013 tax accruals for our subsidiaries as a result of the year-end adjustments for intercompany transactions, based on an independent [trend surprising] study.

In the previous quarter, we had a tax charge of $7.3 million, which included a non-cash tax expense for creating a $7.1 million valuation allowance against all our US deferred tax assets. Net earnings of the minority interest was $900,000 this quarter compared to a net loss of $11.7 million in the third quarter.

Turning now to our cash flow statement, our cash consumption was $1 million this quarter compared to $200,000 in Q3 2013. The cash utilization was primarily attributable to a $1.5 million loss in the IADS business, offset by $500,000 net cash generation in our content services business.

We incurred capital expenditures of approximately $300,000 in the fourth quarter compared to $500,000 in the third quarter. This entire CapEx was attributable to the content services business, as all capital expenditures in IADS business are being expensed through the income statement. We expect our Q1 2014 CapEx to be in the range of $400,000 to $600,000.

Our balance sheet remains healthy, with cash, cash equivalents, and investments in term deposits at banks at $25 million at the end of Q4 compared to $26 million at the end of Q3 2013. Of this, approximately $2.2 million was in the US, and the rest was overseas in our international subsidiaries.

In 2013, we had a $15 million uncommitted line of credit from JPMorgan to finance our working capital needs. This alternative line of credit is not available for our drawdown at present and is subject to review in renegotiations with the bank.

Looking at working capital, our accounts receivable was approximately $11.8 million at the end of the fourth quarter compared to $10.8 million at the end of the third quarter. In terms of DSO, or days sales outstanding, our AR balance was averaging at 68 days this quarter compared to 63 days in Q3 2013. This slight increase in AR balance was primarily on account of a delayed payment from the key customer, which was subsequently received in January 2014.

Let me now review a couple of key items not reflected in the line items in the financial statements. The first is the ForEx corporate contracts, which we take as a hedge against foreign currency risks for our Asian operating expenses. We've been gradually reducing our inventory of foreign exchange hedging contracts due to persisting strength of the US dollar against the Asian currencies.

At the end of the fourth quarter, the total outstanding contracts amounted to $15 million. In Q4, the US dollar appreciated 3% against the Indian rupee and marginally against the Philippine peso. And based on mark-to-market, the notional unrealized losses amounted to $600,000 on these forward contracts as of 31 December 2013. These forward contracts will be maturing over the next 12 months, and any losses or gains of these contracts will be recognized by maturity.

The last point I would like to cover is the position of the US tax assets. Our US tax NOLs at the end of Q4 amounted to $17 million, and these NOLs are available to set up against future taxable profits in the US. At present we are not recognizing deferred tax assets relating to these losses in our books, on account of the uncertainty of future earnings stemming from our continuing investments to build the IADS business.

I will now turn the call over to Jack, who will provide additional insight into the business and our progress on strategic fronts. And after that, we will take your questions. Jack?

Thank you, O'Neil. Good morning, everyone. Thanks for joining us. I'll begin by talking about progress we've made since our last earnings call in executing our Synodex strategy. After that, I will provide some updates on our content services business.

On the Synodex side, we were very pleased with yesterday's public announcement by the Reinsurance Group of America. RGA is a Fortune 500 company and one of the largest global reinsurers, with $40 billion in assets and approximately $3 trillion of life reinsurance in force.

RGA announced a strategic relationship with Synodex, stating its intention to use Synodex data in new, innovative underwriting programs and to incorporate Synodex into its product offerings. This announcement was the culmination of several years of testing and validation of our products by RGA. In this press release, RGA attests to the confidence they have acquired in the quality of Synodex data and the benefits that it believes Synodex brings to the insurance industry as a whole. The announcement is important strategically for multiple reasons.

For starters, it provides a clear and unequivocal endorsement that our client prospects can rely upon. Moreover, reinsurers' willingness to accept risk on the basis of our data means that carriers can save considerable time and money by not having to review the underlying detailed medical records.

This puts us in a whole other league from our competitors. And RGA's intention to incorporate our data into their products and assign risk scores based on Synodex data creates additional value propositions for our services.

RGA has begun to introduce us to its carrier relationships and to co-market its product enhancements with us. This has already helped us get in front of new carriers, and the resulting discussions are moving at a brisk pace. Moreover, we believe that the RGA announcement will help accelerate conversations with carriers currently in the pipeline -- especially those who have reinsurance arrangements with RGA and stand to benefit from RGA's use of our digital data -- and with other reinsurance companies who have expressed interests similar to those of RGA. So for all these reasons, we view the RGA announcement as a key milestone in our commercial strategy, and we are very pleased with this.

Beyond this, we continue to make steady and measured progress. Since our last call, we have initiated pilots with seven new prospects, three of which were completed in the fourth quarter and four of which were completed last month or this month. In addition, so far in the first quarter, we have initiated and completed another two pilots. One of these was with a large independent brokerage agency, two are with reinsurers, and six were with life insurance carriers.

This is in addition to the 26 piloted companies we referred to in our last call as being in our list of active prospects. So altogether, that's total of 35 companies in our active prospect list that we've done pilots for, half of which we are prioritizing as having near-term potential.

We have entered 2014 with a single-minded focus on driving high quality recurring revenue in our Synodex business. To accomplish this, we will continue working closely with our active prospects and early adopter customers, custom configuring the product to work within their workflows and tailoring the product to support their specific underwriting manuals.

In addition, we expect to be bringing on board a senior sales executive who brings a significant track record of success in the life insurance sector. On the development side, we will be completing our workflow 3 product release, which we believe will improve our internal processing speed, integrate new codes and data within our reports, and make our reports more configurable.

We believe that our timing is good here. Slow economic growth has meant declining life insurance sales over the past few years, and the protracted low interest rate environment has meant shrinking investment deals for life insurance companies. As a result of these pressures, life insurance companies are needing to be ever more vigilant in risk appraisal and management, to improve the time it takes to review informal applications, and to increase operational efficiencies while reducing the tedium of data gathering for underwriters. We see that our value propositions -- the ability to reduce underwriting costs and to create efficiencies without any compromise in quality -- are resonating well in this environment.

Turning now to costs, in the fourth quarter Synodex had a gestational loss of $1.1 million, which includes production and engineering expenses, and SG&A costs of $450,000. Taken together this was about $100,000 lower than in Q3.

The production cost includes a large staff that we can immediately deploy to customer engagements as they come in. In our Board's Q1 review of the Synodex business, we reviewed progress with a short list of late-stage clients, other notable clients' activity, and progress around Workflow 3 development. We also have identified specific measures which we will be reviewing progress at the conclusion of our first quarter in terms of claim validation, booking effectiveness, and revenue visibility. We stand ready to modulate our spend in ways that we believe will not impact our ability to meet the market's demand if we see our progress stalling.

In our content services segment, we have continued to rationalize our cost structure to support the goal of producing 10% to 15% pretax earnings at a baseline quarterly revenue level of approximately $15 million. At the same time, we continued to respond with agility to exciting new opportunities, especially in regards to technology services and e-book services. I will walk through some examples of that.

Our technology services group continued to expand the scope of work it performs for one of the largest and most highly regarded textbook distribution companies in the US. Revenue from this client should exceed $2.7 million in 2014, up from $1.7 million in 2013.

While this company built its reputation over the years based on print distribution, we have helped them gain a greater foothold in digital. We have migrated all of their digital content related IT work to our technology development center, further developing and maintaining a digital content solution that this company markets to its publisher and institutional client base. This solution enables publishers to sell content directly to its customers through white-branded, e-commerce enabled bookstores, and for end users to consume the content in a custom e-reader that works across all major platforms.

Here's another example: for one of the largest digital archives, supported by more than 1,000 libraries and publishers and more than 2,000 scholarly societies and associations, our technology services group closed a three-year managed services contract worth over $700,000. We will be developing and supporting custom applications that drive their content ingestion, transformation, analysis, and management.

One last example: our technology services group was successful in a heavily contested RFP to implement a leading XML database for a large UK-based organization. We expect the value of the engagement could approach $800,000.

Now, turning to the e-books arena, we successfully won an engagement with a new client, a well-known provider of online higher education and professional training, to transform its textbooks into highly interactive, multitouch e-books. We began our first phase of the work, which has so far been very well received by the client. This first phase has a booking value of approximately $400,000, and there is the potential for the total booking value to exceed $1 million if the pilot phase continues to go well.

Also in our e-books area, our efforts at focusing on emerging international e-book markets continues to pay off well for us. In the fourth quarter we established partnerships with significant clients in Mexico, Brazil, and Argentina. This includes exclusive production support for two of the top four distributors in Brazil.

These programs have a potential to produce revenues of up to $1 million per year for the next three years. Looking out on the year ahead, we're excited to see several new opportunities in our content services pipeline that have contact values in excess of $1 million. That said, we expect continued ups and downs in the content services business, reflecting its inherent project nature as well as the unpredictability of client budget cycles.

I will now open the line for questions, after which I'll wrap up with some final comments. Operator, we are ready for questions now.

(Operator Instructions) Vincent Colicchio, Noble Financial.

Jack, could your -- the large content services customer that experienced some delays, could you tell us what's going on there, in terms of -- do you think that business will come back? Do you have any visibility to that?

We are continuing to do business with the customer, but a good amount of the work that we did last year, which we expected to be continuing, we've been told is on hold pending budget approvals. It's very hard to predict exactly what happens there. We're going to be closely monitoring it, obviously. And we're hopeful that favorable decisions will get made.

On the e-books side, it looks like revenue grew for the first time sequentially in some time. Do you expect that to continue in 2014?

I think there's some great new e-book opportunities. In my prepared remarks I talked a little bit about some things we're doing in Latin America, which we are having -- seeing some good traction with.

On enhanced e-books, where we're seeing some very interesting new opportunities that are starting to emerge in the enterprise sector, and among distance-learning companies, and things like that. So we continue to be excited about that business, but we also recognize that it's inherently a project-based business that will have ups and downs.

So our plan is to continue to focus on it and grow it aggressively, but not to think that it can become a consistent revenue business. And again, of course that's why we're making the investments we are in the IADS businesses, which we think do hold that promise.

Yes, congratulations on IADS announcement. I'm curious -- can we expect other, similar announcements, maybe in different areas of the insurance market in the coming year?

You know, we're thrilled with the announcement. We really are. In fact, we were remarking just this morning that in our history, this is probably the first time we've had a Fortune 500 company proudly do an announcement about a relationship with us.

We have wonderful clients, but typically, we're on the execution side, kind of behind the scenes, doing some heavy lifting. Here, we are seeing that our innovation has been recognized by the industry, and a key industry leader is proudly proclaiming its excitement about getting on board with what we're doing.

So it's a wonderful thing. We've got a lot of things in the pipeline, a lot of exciting things. And we're working very, very hard at getting them closed and absolutely hope to have other announcements this year.

And, O'Neil, just what was e-book revenue in the quarter? And also, what was the revenue for your biggest client in the quarter?

The e-book revenues for the quarter was 11%. And what was your question on the top -- top three clients?

Top client revenue.

Top client revenue was 17%.

Thank you. I'll go back in the queue. Thanks, guys.

Stan Berenshteyn, Sidoti & Company.

I wanted to look at RGA partnership. In particular, do you have any visibility in terms of contribution to revenue for 2014 coming from that partnership?

As we mentioned in our press release, our arrangements with them or not yet finalized, so we're not putting a number on that. We expect that it will be several millions of dollars in contract value. But again, just to align expectations, it's not my belief right now that we're going to queue that all in one -- you know, overnight. We think it will come in in stages and in a phased approach.

Okay. And in terms of the operating costs, I see the decrease by $1 million from the prior quarter. Now, what does that mean in terms of your operating capacity? In other words, how much can you grow revenue before we will see an uptick in the operating expenses?

Yes, on the Synodex side, we have the production capacity to produce approximately $4 million in contract value per year, and then we've got the -- and that's on the labor that's presently in place. The infrastructural capacity, of course, well exceeds that. So after $4 million of contract value, approximately $100 of additional capacity will come at a cost of $35 or so.

Okay.

It sells pretty well after that tip.

Okay. And lastly, I saw a couple weeks ago Apple announced their iTunes U initiative. I was curious if Innodata is going to get a piece of this business? And if so, is this going to increase incremental revenue, or just kind of going to continue the e-book revenue -- the similar stream as 2013?

We really don't comment that specifically on client engagements. It's our strategic imperative to work very closely with Apple, of course -- they're our largest client -- and to stay very close to their strategies.

Okay, thank you, guys.

(Operator Instructions) Tim Clarkson, Van Clemens.

Nice profitability for the quarter. Couple of questions. One, could you just explain on this RGA exactly, in the simplest terms, what's the value that Innodata is bringing to this reinsurance company?

Sure. I'm trying to simplify it in my mind, Tim. I guess I'd look at it this way. What RGA is saying is that they intend to use our data in new, innovative underwriting programs. So I think they are seeing the ability to use our data to help transform their business and beyond their business --.

Which data, Jack? What kind of data are we talking about?

So what we're talking about is our ability to create -- essentially, it's a data feed from unstructured healthcare records. Insurance companies and reinsurance companies use healthcare records extensively in their underwriting process. Never before has -- have healthcare records been available in a structured, consistent, high quality XML data format. Our innovation is bringing that to these companies, and they're seeing exciting ways that they can use that in their programs.

So in other words, let's say that there is an underwriter that's looking at giving life insurance to Tim Clarkson, and they want to know what my cholesterol level is, my blood pressure is, and my family history, and so on. You take that data, which is unstructured; and then digitize it, have it in a structured format; and that adds validity and ease-of-use to the end user?

That's exactly right, Tim, in a simplified form, of course. And beyond that, because our data is in a structured format, we can use -- apply underwriting rules against that data. We can invite other participants to apply rules against that data, as RGA is signaling that they intend to do. So they'll be able to assign risk scores based on our data, and to automatically assign risk scores based on healthcare histories and things like that. So it brings a lot of transformational opportunity to the industry.

Okay. On another item, on this JPMorgan line of credit snafu, I assume -- does Innodata have a relationship with JPMorgan? Or is this something you're looking to potentially get a different banker?

We have a very good relationship with JPMorgan; I think it should be seen a little bit in the context here. We have traditionally never borrowed from any bank, and the line of credit that we have is an uncommitted line of credit. And it is securitized only by Innodata's AR balances.

In other words, J.P. Morgan does not have a security interest over our global assets and our global cash balances. So they tend to look at the lending to the US entity at a pretty narrow fashion, as to what the AR balances are and what are the cash flows of the US entity? And what they are saying is: we want to understand that in the context of the investments we are making into IADS for 2014 before they take a decision.

Okay, all right.

And lastly, just to make a point, it is not that they have terminated their relationship with us. They continue to be our bankers; we continue to do forward covers with them. So it is not a question of termination, but it's a question of them trying to understand more precisely as to how our cash will rotate in the US entity for 2014.

Okay. Yes, and I'm on the record, obviously, in terms of wanting to do a stock buyback. I'll talk to you guys privately more about that.

Brad Hathaway, Far View Capital Management.

Congratulations on the RGA announcement. A couple of quick questions in that vein. First off, does the Q1 guidance include any revenue from RGA?

No, it does not.

Okay. And is that a relationship you'd expect to start up relatively soon, or it's going to take a little while to get from kind of announcement to actually generating revenue?

No, we're working pretty fast and furious at getting things going there, which is exciting. But again, my cautionary note is that we think that it will come up in stages and be phased in.

Yes, okay. I mean, just kind of a timing is -- you know, the first revenue, we're thinking possibly in Q1? Or it more kind of second half, or --?

Possibly in Q1. But we're not depending on that. There are several things involved in --.

Great. And you touched on this a little bit in your prepared remarks, but you've always said historically that the insurance industry is kind of slow to lead but fast to follow. So now you have a leader who has adopted Synodex. Does that mean that you believe that you have really kind of turned the corner here, and this is really kind of the key signpost for adoption going forward?

You know, I guess that remains to be seen. We're very hopeful about that.

And what we're excited about is that the -- the reinsurance companies are critical in this ecosystem. They really do set the standards. They are very influential, and RGA is among the most influential of the reinsurers.

What we're seeing is that the ability of carriers and reinsurers to use our data creates value for both the carrier and for the reinsurer. So it's a real win-win. And when they start incorporating it into their products, as they are suggesting that they will be doing, we do believe that that will help create velocity around adoption. So we're very excited about it.

Excellent. Sounds great. Congratulations on the first bit of momentum for Synodex.

Bill Sutherland, Emerging Growth Equities.

I was just wondering if you could give us a little more color on the implications for you guys for a contract with someone like RGA? And maybe you just want to talk hypothetically about what's involved with this size reinsurer?

Sure. Well, I think the value of the RGA contract for us -- or it's not yet a contract -- for the announcement and the contracts that we expect to follow will be several-fold. First and most notably, it will be a revenue opportunity for us, which, as I said, we expect to phase in slowly over the course of the year, hopefully beginning in first quarter. But that's aspirational.

Beyond that, we see that it's very strategic, what they are looking to do with our data, which is incorporating it not just into their operations, which they'll be doing, but also into their products -- and to be comarketing with us to their carrier relationships the opportunity to integrate our data. So that right there creates tremendous value, and we think will help accelerate and provide momentum to our marketing efforts.

Jack, if I could interrupt just to get a little more understanding of what that comarketing -- I mean, one example of it that comes to mind?

Sure. An example of that is going with RGA to an RGA customer and showing them how the assignment of risk scores based on the pharma feed will, once it includes Synodex data, offer more protective value for the client.

Okay.

And then beyond that, showing the value to the client in terms of efficiencies and productivities. So RGA has an interest in seeing that their products are improved and adopted. We have an interest in bringing more carriers onto our platform. And those interests align very, very well.

We've made some of those -- a couple of those calls. We intend to do a lot more with RGA. And we're seeing that the carriers that we're talking to with RGA seem to move very quickly in their interest level in terms of moving forward with the service.

And then, I think to date Synodex has had one or two customers. Is that correct?

That's right.

And they're significantly smaller than RGA, just in terms of their needs and size?

That's also correct.

Okay.

RGA is likely -- I think RGA will be our first large customer. And more important as a first large customer than perhaps even other large customers would be -- again, because the reinsurers are so very influential in this space. And the opportunity to partner with them in the industry should provide a very compelling distribution opportunity for us.

And not to paint you guys into a corner at all, but just trying to get a sense of how big the bread box is, or if it's bigger than one: is the RGA revenue opportunity a multiple of the existing customers?

Yes. The RGA revenue opportunity is significantly larger than the things that we've been working on. But again, I just want to repeat it for third time: I do want to caution people not to expect that it comes on fast and furious, and that it will come on in a phased way --.

Oh, of course, of course. No.

And that the strategic value to us even exceeds the bookings value of -- or the likely anticipated booking value of the RGA opportunity.

Okay, I appreciate it. Thank you.

Joe Furst, Furst Associates.

Good morning, gentlemen, and congratulations on the new customer. The other 25 people that you said you've done pilots for and so on: I would assume, since you said nothing, that all 25 of them are still somewhere in the process, some further along than others. Is that correct?

Yes, that's correct. And we did, as I mentioned, I think, seven new pilots in Q4 and two more in Q1. And as you would expect, they are moving at different rates, and a different pace, and all of that. We're staying very close to them and hopeful that we'll be having some more customers coming on board in the very near future.

What's the biggest impediment to getting these things done? What's the biggest obstacle you have run into people? Not that -- they're not seeing no; it's just to get it through their systems?

I think that there is no single common obstacle. Incorporating our service is a major commitment to them. They're very careful. They're insurance companies. They are very careful that they fully understand what our product can do within their environments. Then they put together a careful business case that they have high confidence in the quality of our data.

Again, the RGA announcement is very helpful in that regard, because we've got a major player in the industry saying that they've taken a careful look over multiple years now of a study of our service, and they've got full confidence in our ability to handle the most difficult cases. So we expect that that will also help accelerate things.

I think one of the most important things that I think you mentioned previously is that these insurance companies are very slow to innovate and very quick to follow. So now that you have got someone of great reputation and great size who thinks your product is very good, it certainly should make it easier for others. Keep up the good work. Thank you.

We think that's right. Thank you, Joe.

George Melas, MKH Management.

Congratulations on the announcement, first. Quick question on the life insurance reinsurance industry. Could you give us a quick landscape -- how many players there are; how big is RGA in that space; what market share do they have? Sort of rough brushstrokes on that.

Yes. RGA is one of the leading reinsurers. We are also working closely with a number of other leading reinsurers. Not all reinsurers specialize in the kind of underwriting that RGA does, which implicates our surface. So just looking at their sizes could be -- you have to look a little bit deeper.

But suffice it to say that there are a number of other reinsurers who also do facultative underwriting, which is what RGA is well known for. And we're trying to do a good job covering those, as well.

Okay. How many other similar reinsurers are you guys working with or have you done pilots with?

You know, I don't have that (inaudible) number in front of me, but we are deep into working with a number of others. And we see that they are following similar paths.

Okay, great. And then two other quick questions. Do these reinsurers typically have products that then their carriers adopt, and that's how they collaborate?

They do. Many of them have very specific products that help carriers assess risk. And many of them have automated solutions that help carriers automate portions of risk assessment. And our product can enhance those automated solutions, quite likely.

Okay, great. And then the final question, on content services: did you reduce the capacity that you had with content services, especially in the e-books area, and that enabled you, then, to lower your cost of service? Or would you still have capacity to get well beyond that $50 million content services?

Yes. We have not taken down our capacity to respond to e-book opportunities or other content services opportunities. And as I said in my remarks, we're seeing some large new opportunities emerging in the pipeline, which is very good to see. And it's our intention to go after them very aggressively and to bring them in.

And so if you bring additional revenue there, you would be able to maintain your current margin -- so current gross margins? You actually would probably improve them.

If we bring in additional revenue, we'd see the gross margins improve.

Yes, okay. Thank you very much.

(Operator Instructions) Charlie Pine, Van Clemens.

A few brief questions. Returning to the topic of the Synodex pipeline, you stated that approximately 50% of the 35-odd trials that you completed you defined as having -- I believe you said near-term potential. I guess I'd like to know what you are defining as, number one, near-term potential? And number two, how would you characterize where things stand with the other 50% that don't have near-term potential? What's going on with those?

Charlie, there isn't a bright-line definition there. And when we go client by client, we're making guesses. We're making approximations.

What we're trying to do is to take the level of interest we're receiving, which is high, and qualify that for nearest-term potential. We're very driven to bring in business and prioritize correctly around business that can be brought in most quickly.

We're working on things that we think could be -- you know, if we are correct, that could be brought in within the next couple of months. So when we talk about near-term potential, we're talking about weeks and months. And things that go outside of that we think about as having longer-term potential.

Sometimes we can easily be surprised. Something that we think is -- will take longer ends up taking less time; and something we think could go faster takes more time. So there's a certain dynamic quality to that, and we are always assessing it and always thinking about, where is the lowest-hanging fruit? Where can we move most quickly?

The ones that -- of the roughly half that you wouldn't say have near-term potential: are some of those still -- would you consider open doors at some point? Or have a number of these that have actually run pilots just decided that the service really just is not of interest to them at this point?

The ones that we are saying don't have near-term potential, we still think have potential within a 12-month period of time, let's just say. There are some that we think are outside of that, and we're not including those in that list of the 26 -- or now the 35.

Okay, great.

There are a few that we think for various reasons don't have potential, and those are off our map.

Well, it sounds like you're developing a good batting average, then. What's the status of -- right now as far as the -- I guess you kind of defined it as a restart last quarter with docGenix. What's going on there?

Sure. What we're working on there is trying to make some changes to the product to make it appeal to a larger market as opposed to early adopters, who are very interested in digital technologies. So we're widening the numbers of contract types that we can address through the product. We're putting in new user interface on it.

And we're going to leverage some of the production technology that has been brought in for Synodex, which is very highly rated for information security, something that the financial services companies care a lot about. And we're going to start borrowing from that in the financial services area, as well. Beyond that, we are creating some new functionality to enable banks to alter some of the documents in using our service, as well.

We've got one customer who, I've said before, proudly proclaims that it has the best risk -- contract risk management system on Wall Street, thanks to our product, and wants to make introductions to us. We're holding them back, saying, let us get our -- make these revisions to the product, and then we'll take you up on that invitation for referrals. And my hope is around in the springtime, probably late springtime, we are in a position to start selling that new product release.

Okay. So you're looking at general availability sometime late spring, early summer, then?

Correct.

And lastly, I kind of noticed that after all this time, you actually now have a name for the Synodex product. It's called APS.Extract? What's the derivation of that? What does it mean?

Sure. APS --.

After a couple of years, we never even knew this had a name.

Okay. Well, APS stands for applied position statement. It's what the insurance companies refer to as the healthcare record that they obtain in order to perform an underwriting. Our Extract is just that; it's a digital XML extract of critical impairments and critical terms from the APS. So that's the derivation of the name.

Okay. All right, great. Well, thanks very much, and continued best wishes.

Perry Highland, Rubicon Wealth Advisors.

Congratulations on the RGA. But only one question: are you still looking at acquisitions or anything?

Thanks for the question. The answer is unequivocally yes. In fact, O'Neil and I were out just -- I guess it was last week visiting with a company. O'Neil says I'm not allowed to say that, but I don't know why. I'm not going to say where it was or who it is. Yes, we are continuing to look, and we intend to maintain that search.

Perry, just to add a little bit more to that here: so we have a pipeline that has -- in early stage, we've got three or four deals that have emerged that seem to look interesting. And Jack and I, we visited a particular prospect just last week. So we are doing our best to look at good assets, where we can leverage our skills and competencies, and look for those opportunities that enjoy a secular growth trend in the marketplace.

Okay. Thank you very much.

Brad Hathaway, Far View Capital Management.

Quick question on the cash. So I know that you have previously talked about options you would have for bringing it back onshore without incurring that full tax penalty. Can you maybe elaborate on what you think you could do to bring some of that $22 million, I believe, back to the US?

Brad, let me give you a perspective on the flow of money within the Innodata group, so that you can understand how it moves and how we finance our business. As you know, all our invoicing and billing takes place through the US entity, and our clients are either US-based or they're based in Europe. So the money all essentially first comes into the US entity, and then we fund and finance the subsidiaries for the services they provide.

So we have control over a significant amount of cash flow. Now where does the constraint come in? The constraint comes in essentially at the end of each quarter; we just want to make sure that the amounts we owe to our subsidiaries are settled within a reasonable time frame. Because if we don't do that, we trip over an IRS regulation that says that the money we don't pay them in the normal course of business will be considered as being dividends.

So what's our strategy in the context of this? Our strategy is that we're going to be using our existing US cash balances and focus on the AR and expediting our collections to meet our US cash requirements. And the last and final recourse will be to rely on the international cash balances that we have. That's the last recourse for the simple reason that bringing money to the US has a tax implication.

Understood. I guess through prior conversation, there were suggestions that through use of some your tax assets, you might be able to actually mitigate a portion of those tax implications.

Right. That is technically absolutely right. We can. There would be a minimum AMP, which we estimate will be between 4% to 5%. But we also look at -- in the context that it is an asset, the NOLs. And we just won't want to take it very lightly. We want to ideally apply it to those operating profits and leverage that for the benefit of shareholders.

Completely understood that it's a last recourse. I was just trying to think about how to appropriately haircut your overseas cash. But thank you very much. That's all I needed to now.

(Operator Instructions) And there are no other questions at this time. I'll turn it back to management for closing remarks.

Thank you, operator. So to recap a bit, we're very pleased with RGA's press release of yesterday and the marketplace validation that comes with that. We continue to make steady progress on our Synodex strategy. We hope to have more good news soon.

On the content services side, there's some exciting new opportunities, several of which exceed $1 million in potential contract value. But we expect continued ups and downs in this segment, given the combination of its inherent project nature and difficult-to-predict client budget cycles.

So thanks everybody for joining us today, for your continued support. Look forward to talking next time.

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