Innodata Inc (INOD) 2014 Q2 法說會逐字稿

Good morning and welcome to the Innodata second-quarter 2014 earnings conference call. Today's conference is being recorded. At this time I would like to turn the conference over to Raj Jain. Please go ahead.

Thank you, Orlando. 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 will hear from O'Neill first, who will provide detailed review of our second-quarter results, and then Jack will follow with additional perspective about the business. We will then take your questions.

First, let me qualify the forward-looking statements that are made during the call. These statements are based largely on our current expectations and are subject to a number of risks and uncertainties, including without limitations that contracts may be terminated by clients, projected or committed volumes of work may not materialize.

Our Innodata Advanced Data Solutions segment, IADS, is a new venture with minimal revenues that has incurred losses since inception and has recorded impairment charges for all of its fixed assets. We currently intend to continue to invest in IADS.

The primary at-will nature of contracts with our Content Services clients and ability of these clients to reduce, delay, or cancel projects; continuing Content Services segment revenue concentration in a limited number of clients; 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 clients and prospective clients to execute business plans which give rise to requirements for digital content and professional services in knowledge processing; difficulty in integrating and deriving synergies from acquisitions, joint venture, 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 the call over to O'Neil.

Thank you, Raj. Good morning, everyone. Thank you once again for joining us today to review our Q2 results and to discuss our acquisition of MediaMiser, which we announced yesterday.

I will start with a few words on MediaMiser, after which I will review the financials for the quarter. After I am done, Jack will discuss the MediaMiser acquisition in more detail and provide his update relating to the quarter. After that we will both take your questions.

The acquisition of Media Miser is a perfect fit for our strategy of broadening our service offerings in areas where we can keep growing with recurring and predictable revenues supported by proprietary IP. Media Miser typically signs multiyear subscription agreements with its clients and its retention rate at renewal time is over 90%. What's more, MediaMiser's platform is built around proprietary real-time intelligence and big data engines, and it serves a complex and evolving need of businesses and government institutions which is real-time monitoring of vast amounts of public content in social and traditional media.

Jack and I have spent a good deal of time over the past few months with the MediaMiser team including Brett Serjeantson, Chris Morrison, Martin Lyster, and David Nadeau. Together they have delivered 12 consecutive quarters of revenue growth over the past three years with a compound annual growth rate of 25%. Now, with a view to accelerate growth through both product and market development, they are excited to have at their disposal what they see as our deep technology capabilities and global footprint.

Turning now to the financials for the quarter, total revenue in the second quarter was $14.3 million compared to $14.1 million in the first quarter. On a segment basis, Content Services reported $14.1 million this quarter compared to $14 million in Q1 and Advanced Data Solutions business reported $200,000 in this quarter compared to $100,000 in Q1. Revenues from our top three clients stayed in the 40% to 41% range in both quarters.

Looking ahead, our revenue guidance for Q3 is between $15 million and $16 million, which includes revenue contribution for two months from MediaMiser.

Let me now review our gross margins. Our gross margins were under pressure this quarter due to increases in costs. On a consolidated basis, gross margins in Q2 were $3 million, or 21% of revenues, compared to $3.8 million, or 27% of revenues, in Q1. The $800,000 increase in cost of sales included $100,000 in ramp-up costs for new projects and $300,000 in nonrecurring expenses for severance and an accounting reserve for delay in receiving a value-added tax refund for prior years.

Of the remaining $400,000, $300,000 was a result of annual wage increases for production and other support staff which came into effect in April and $100,000 was primarily on account of seasonal factors. The severance cost of $100,000 in this quarter and another approximately $250,000 to be incurred in Q3 will result in annual cost savings of between $1.3 million to $1.5 million per annum. Jack will discuss this cost reduction initiative in more detail.

On a segment basis, gross margin in our Content Services business was $4 million, or 28% of revenues, in Q2 compared to $4.8 million, or 34% of revenues, in the first quarter. In IADS, cost of sales exceeded revenues by approximately $1 million in both quarters.

Our selling, general, and administrative expenses increased marginally to $3.9 million this quarter compared to $3.8 million in the previous quarter. As a percentage of revenues, it was consistent at 27% in both quarters. The increase was primarily due to an addition to sales leadership in the Synodex business.

Moving down to pretax earnings, we incurred a pretax loss of $900,000 this quarter compared to a pretax loss in Q1 of $5,000. A combination of lower gross margins of $800,000 and an increase in SG&A expense of $100,000 contributed to higher losses.

This pretax loss is after absorbing IADS gestational losses of $1.4 million. If we were to exclude IADS's gestational costs, pretax earnings in our Content Services business would be $500,000, or 4% of revenues, compared to $1.4 million, or 10% of revenues, in the prior quarter. Tax expense remained at $100,000 in both quarters. Net loss after minority interest was $700,000 this quarter compared to net earnings of $200,000 in the first quarter.

Turning now to our cash flows, we generated $100,000 in cash this quarter compared to $4.4 million in the prior quarter. Our cash flows in Q1 benefited primarily from a $3.4 million decline in [AR] balances.

We incurred capital expenditures of approximately $700,000 in the second quarter compared to $900,000 in the first quarter. This CapEx spend is entirely attributable to our Content Services business as we continue to expense all expenditures in our IADS business through the income statement. We expect our Q3 2014 CapEx to be in the range of $500,000 to $800,000.

Our balance sheet remains strong with cash and investments totaling $28 million at the end of Q2 compared to $29 million at the end of Q1. Of this, approximately $4.6 million was held in the US and the rest was held overseas by our international subsidiaries. As disclosed in the press release, the current payment of $4.2 million for the MediaMiser acquisition was funded from our overseas cash reserves of $23.4 million.

Looking at working capital, accounts receivables were approximately $9.4 million at the end of Q2 compared to $8.5 million at the end of the first quarter. This increase in our AR balance was primarily on the part of growth in revenues and timing of payment by customers. In terms of days sales outstanding, our AR balance averaged at 68 days this quarter compared to 67 days in Q1.

Let me now review our foreign exchange hedging program. At the end of the second quarter, our total outstanding quarters' currency forward contracts taken to hedge our ForEx exposures amounted to $17.5 million. In Q2, the US dollar lost 3% against the Indian rupee and was constant against the Philippine peso, and based on mark-to-market, this resulted in a $300,000 notional unrealized gains on our outstanding hedges. These forward contracts will mature over next 12 months and any loss or gains on these contracts will be recognized upon maturity.

Thank you and now I will pass the call over to Jack.

Thank you, O'Neil. Good morning, everyone. Thank you for joining us. Let's start with the MediaMiser acquisition announced yesterday.

As O'Neil mentioned a few minutes ago, the MediaMiser acquisition fits squarely within our strategy to grow our portfolio of recurring and predictable revenue. MediaMiser typically signs multiyear subscription agreements with clients and has enjoyed a 90% or over 90% retention rate. Moreover, it has experienced steady growth over the last 12 consecutive quarters at a compound annual growth rate of 25%.

In addition to its predictable and recurring cash flow, I would like to share with you some of the other key investment highlights that we see in MediaMiser, which will enable you to see why we are so enthusiastic about the acquisition.

First, the MediaMiser business scales particularly well. A platform play, there is considerable operating leverage in the model as new clients are brought on to the platform. This high operating leverage, combined with gross margins in excess of 60%, should translate into long-term operating margin potential in excess of 25% of revenue.

For fiscal year ended March 31, 2014, MediaMiser reported revenues of CAD3.9 million, gross margins of 60%, and negative EBITDA of CAD200,000. In our models, we have assumed that an incremental [$]1 million in revenue at current prices should bring in about 70% contribution at the gross margin level and about 55% to 60% contribution of the operating income level. We will share more operating metrics with investors over the next couple of quarters to enable you to better understand the business and its potential.

Secondly, MediaMiser has developed a great product. They have built a proprietary platform that collects in real time information from over 200,000 sources of public content, converting it into relevant actionable data for companies that need to monitor public sentiment. The content they cover includes both traditional media, like newspapers, TV, and radio, as well as social media, like blogs and Twitter.

Third, MediaMiser has an impressive customer base. Its customers include a broad range of Fortune 500 logos and governmental institutions. O'Neil and I spoke to a number of MediaMiser's customers as part of our due diligence. We have consistently heard about how valuable they found MediaMiser products in helping them monitor and manage their public image and how they felt that MediaMiser suited their needs better than competing products.

While most of MediaMiser's existing business is at the large enterprise level, they have a new product called SNAP designed for the small and medium enterprise segment. SNAP Version 1.0 currently has 10 customers. MediaMiser is intending to do a bigger launch when Version 2.0 is released later this summer.

And here is the fourth key investor highlight. MediaMiser's offerings are directed at large addressable markets that are both emerging and dynamic. A report released in April by market research firm Burton-Taylor indicated that media intelligence and public relations information software spend tops $2.2 billion for the first time in 2013, with demand for social media up over 20% and three-year annual growth of close to 6%.

Meanwhile, in a report commissioned by us, Outsell sized of the traditional media monitoring market in 2012 at about $536 million, but noted that the traditional companies are morphing into being a combination of media tracking including social media, distribution, database services, and workflow analytics platforms around press activity. Outsell sized this wider market to be approximately $2 billion.

Further, the amount of content in social media is growing exponentially, which means it will keep driving up the need for organizations to monitor and leverage social media for their businesses. In other words, the long-term secular trend is positive.

While the data that I have shared here is limited to public relations in terms of use cases, it was interesting to learn in the course of our due diligence that MediaMiser is actually addressing use cases outside of PR as well. One large firm, for example, is using MediaMiser to monitor its suppliers. Several government clients are using MediaMiser to monitor public's perception of their service levels. Two large corporate are using MediaMiser to monitor commercial news and competitors' activities.

The fifth key investment highlight is that there are good synergy opportunities between Innodata and MediaMiser. Much of the work that MediaMiser does when it customizes reports for its customers is similar to work that we do for several of our clients. Therefore, we see significant opportunities to leverage Innodata's current offshore content production services as MediaMiser seeks to scale its operations. In addition, the technologies that are at the foundation of the MediaMiser solution are technologies in which we either have expertise or have been in the process of developing expertise, so there's an opportunity to share resources there as well.

Moving on to the sixth important investment highlight, with MediaMiser we are inheriting a solid team. Brett Serjeantson, Chris Morrison, Martin Lyster, and David Nadeau, the MediaMiser core management team, are all people that we expect will take well to the Innodata culture. They care deeply about their customers whose trust and loyalty they have earned through hard work and they have demonstrated the ability to reinvent and create and respond with agility to customer needs.

Importantly, the team is not viewing the acquisition as an exit strategy, but rather as an opportunity to leverage our capabilities to accelerate their growth. The deal terms reflect this.

The purchase price includes an upfront payment of $4.1 million, of which approximately $1.7 million went to repaying debt; $6.1 million towards working capital and other adjustments; approximately $1.3 million in deferred payments to be paid in installments in July 2015 and July 2016. In addition, there is an opportunity for the management team and an employee trust to earn up to approximately $4.6 million in additional consideration based on their ability to grow the business above certain performance milestones over the next three years. We have an option to settle 100% of this deferred payment and up to 70% of the earnout with our stock.

I have stated all these amounts in US dollars for simplicity's sake, although they are actually denominated in Canadian dollars. You can, of course, refer to our Form 8-K filing with the SEC for full details on the transaction. I will now move to the seventh key investment highlight.

Because MediaMiser is a Canadian company, we were able to fund the acquisition from our offshore cash reserves without incurring taxes for repaid trading funds onshore. Lastly, from a narrative perspective, MediaMiser fits well within our services and solutions portfolio, providing high-value services that help professionals make better decisions. Using digital data to help people make better decisions is the strategically unifying theme in our business.

Whether we are helping global information providers build and maintain new information products, or whether we are offering our own solutions, such as docGenix and Synodex to the market, what we are doing is helping professionals make better decisions. In essence, we use technology, people, and processes to digest a whole bunch of messy, disorganized, overinclusive information, separate wheat from chaff to extract what is truly of value to a particular market, organize that valuable knowledge for the market's intended use cases, and disseminate it in the most user-friendly formats and over the most user-friendly platforms.

What I have described here is exactly what MediaMiser does as well. MediaMiser takes raw data, removes impurities, changes its state, adds value, and disseminates it over a SaaS-based platform; at the end of the day helping companies make better decisions. We are very much forward to -- very much looking forward to working with the MediaMiser team to leverage our respective strengths, to provide value to customers, and to scale the business and in doing so to create value for investors.

While MediaMiser has done a great job validating its product market fit and has a strong business model, the constraint of being self-funded has meant that it has yet to make any significant investment in sales and marketing. Their access to our resources will enable them to focus on growth. If we are successful, and given their subscription-based recurring revenues, high margins, and high retention rates, we think investors will highly value the enterprise. Recent comps suggests that these kinds of businesses, once they reach a critical mass, are often valued at as much as 4 times revenue or more.

I will now shift to ongoing Innodata business. On the IADS side, last quarter we shared with you that our Synodex subsidiary has signed two new significant contracts but that each of them required some additional approvals before work could commence. The first contract had a three-year initial term with a potential to result in approximately $1.3 million of revenue per year. The client has indicated to us that it is confident that final approvals will be obtained this summer.

The second contract, which had an initial term of two years with the potential to result in approximately $2.5 million in revenue per year, we anticipated getting off to a slow start as the client needed to obtain several third-party consents. We are pleased to report that the client has obtained the first of these required consents, one of which comes from one of its largest customers, and this has enabled us to begin delivering data.

In addition, we just recently obtained a preliminary verbal go-ahead from another client. We hope to move this to contract in the September/October timeframe. Our main disappointment was one customer whose senior management had said they wanted to use us, but will not be bringing it for final Board approval, as it turns out, until early next year.

We made the decision in Q2 to begin showing our Workflow 3 mockups to our client prospects. While we were aware that by doing so we might further draw out an already lengthy sales process, we nevertheless decided that Workflow 3 had such significant strengths that our increased probability of success offset the concern about additional delay. We are now completing the release and we hope to be producing Workflow 3 data beginning in September.

The reason we are so excited about the release is that it incorporates detailed feedback we've received from 16 client prospects over the course of the past several months. Some of the requirements necessitated architectural changes that were broader than we initially envisioned, which has resulted in it taking a bit more time to finish. But the important thing is that when we show Workflow 3 mockups to our active prospects, we are getting a very enthusiastic response and we are presently using the underlying Workflow 3 technology for a large reinsurer with solid results.

In Q2, our business development team attended the annual conference of the Association of Home Office Underwriters in Indianapolis, Indiana. This four-day conference is one of the largest annual gatherings of life insurance underwriters and, strikingly, the theme of this year's conference was innovations in risk assessment. We had a full dance card of new interested potential prospects that we met with at the conference. Again, we showed our Workflow 3 mockups to several of these new relationships and we received enthusiastic response and requests for follow-up meetings, several of which have taken place already.

Nevertheless, given the protracted nature of things within this sector as well as the time that it has taken for us to fine-tune the product and given some management changes that we have decided to make anyway, we have recently reduced our Synodex-related spend from approximately $1.3 million per quarter to $1.1 million per quarter, producing an annualized $800,000 in savings.

In addition, we have trimmed another $700,000 per year of costs from our content services business for total annual costs takeout of $1.5 million. This combined cost savings initiative has resulted in approximately $100,000 of severance costs in the second quarter and will result in another $200,000 of severance costs in the third quarter. We will see the benefits of it beginning in Q3.

On docGenix, our solution for document risk management, we are completing our redesign, which will enable us to address a wider variety of document types, to provide clients with a much more friendly and intuitive user interface, and to process documents using our ultra-secure Oracle processing engine that we use for Synodex. While we are not yet in sales and marketing mode, we had a large European bank request a demo just a few weeks ago and their preliminary reaction was that our product is unique and seems well-suited to their needs. We intend to ramp up our docGenix 2 market outreach this fall.

On the Content Services side, we reported to you last quarter that we had been selected by a large European-based information company to provide end-to-end content creation and management services to two of their divisions, that we had executed a letter of intent with one of these divisions, and that we were in the process of finalizing a letter of intent with the other. We are pleased to report that in the second quarter we finalized the second letter of intent. Each of these LOIs anticipate signing a series of statements of work, which taken together and when signed could potentially yield approximately $10 million of recurring revenue per year once we are fully ramped up in year three of operations.

One of the LOIs provides for us to re-badge certain key staff including select executive managers and subject matter experts and for us to open a new European office. The rebadged executive managers will form the nexus of our new management team responsible both for servicing our client and for driving additional growth. We have identified certain growth opportunities in Europe which our new managers will be responsible to pursue beginning in year two of our operations.

In our Content Services segment, we are also pursuing several interesting opportunities of significant potential value. There is not much that I can say about them at this point other than that we are very focused and excited about their potential.

In the second half of the year, we will be very focused on a successful launch of our new Synodex 3.0 solution and the launch of our docGenix 2.0 solution. At the same time, we will be working on a successful integration of MediaMiser. Based solely on where we are now, we would be going into 2015 with about $40 million in recurring content services segment projects, hopefully the opportunity to recognize half of the $10 million in recurring revenue from the new European letters of intent based on the current ramp-up schedule, a fairly dependable $15 million per year of project work from recurring customers, and another $4 million in MediaMiser recurring revenue.

On the Synodex side, while we have about $4 million of contracts signed, what we get to recognize as revenue will depend entirely on timing factors that we've already discussed and that are driven by the clients. But if we take an upward -- if we take an optimistic view of this and add it all together, it gives us a level of visibility on approximately $70 million in potential revenue for 2015 on a $53 million recurring revenue base. Our strategy for the second half of 2014 will be to build on these numbers with a combination of new Synodex 3.0 bookings, new docGenix 2.0 bookings, as well as bookings that we hope will result from several important new initiatives that we are working on in Content Services.

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

(Operator Instructions) Stan Berenshteyn, Sidoti.

Good morning, gentlemen. Thank you for taking my call. I wanted to start by looking at the expenses internationally. Can you give us a better idea of where our headcount is, perhaps where it's headed, and also whether the wage increase that you saw was this broad based or was this specific to particular employees?

The total headcount that we have is approximately 4,900. There's been no significant increase in terms of the number of headcount. Typically in our business we give annual increases in wages for our production and support staff in Asia around the April timeframe. So this was part of that annual increase that came into effect, which effectively ran through the cost of goods level to the extent of about 70% and a small percentage through the SG&A.

Can you give us an idea -- there was no mention of docGenix. Has there been any developments there, any increases to recent revenue stream?

I actually did mention docGenix in the remarks and what I said was that we are continuing to work on the relaunch that we are not yet in sales and marketing mode, but that we expect to be in the fall. Fortuitously, though, we did have a meeting with a very large, highly-regarded European bank who we showed the solution to and it was very well received by them. They told us what we had there was unique and very much aligned to what they were looking for, so we've got follow-up meetings arranged there. But very, very good feedback that we were welcome to receive.

Okay. And I believe O'Neill mentioned that capital expenditure is expected to be between $0.5 million and $800,000. Is there a particular ramp-up involved with establishing operations in Europe and will that come back down? Or is this more of a steady-state that we are looking at for a couple of years?

The CapEx that I shared with you is going to be pretty much steady-state. The CapEx that we are anticipating to do in Europe is going to be pretty minimal. Most of the CapEx that we are talking about in terms of expected expenditure, at least for the next two to three quarters, will be in our delivery centers in Asia.

How many people work at MediaMiser? Is everybody coming on board or is there some kind of restructuring that's going to happen?

It's 50 people and our emphasis is going to be on growth and taking advantage of the fact that we have a global footprint. MediaMiser, we are looking to what can be leveraged or -- in terms of go to market and also in terms of accelerating some of the product development work.

Okay, last question. The synergies that you are expecting from this acquisition, what's your projection for when you will realize these synergies?

Right. What we are extremely excited about this acquisition and what makes it so compelling is, clearly, we have a great product that solves a very complex problem for businesses and government institutions. Jack talked about it, which is monitoring in real-time vast amounts of public content in traditional and social media.

The focus here is really on growth, so the synergies that we will look for initially are how to bring about that growth, because the business model is extremely powerful in terms of variable margin contribution of over 60% and most of that will kind of flow down to the bottom line. So, once again, that the synergies are going to be more on driving growth.

Actually, just one more question. What is the size of the salesforce at MediaMiser?

They have a salesforce of five people plus the executive team spends a great amount of time on sales and marketing as well.

Okay, thank you very much.

Vincent Colicchio, Noble Financial.

Jeff, I apologize if I missed this, but have you spoken to your existing clients about MediaMiser yet? And if so, what was the feedback?

No, we have not yet, Vince, but we do intend to. We are planning on making some special offers to be able to be helpful to some of those existing clients.

I'm curious; are there any legal issues with what MediaMiser does? Have they had to tweak their product over time in that vein?

From a legal perspective, is that what you said?

Yes, in terms of with the information they collect, yes.

Not that I'm aware of.

How did you tie in the senior management? Do you have non-compete agreements?

Like Jack talked about in his prepared remarks, the transaction is all about working together. Yes, there are non-compete, but more importantly, the team is going to be working with us in terms of growing the business. And there are financial incentives attached to that in terms of attractive earnout compensation based on certain revenue multipliers linked to a minimum performance of achieving $6 million of revenues. So any revenues in excess of that has got a revenue multiplier.

To O'Neil's point, when you look at how we structured the transaction, there was very little money that came out of the business. Most of the upfront was applied to balance sheet cleanup and such, so we've got what I perceive as a very hungry, innovative staff ready to take it up to the next level and who is working and going to be working real hard to that year three payout opportunity.

O'Neill, what was ADS revenue in the quarter and what was e-book revenue in the quarter?

IADS was $200,000 and e-book was 14%.

What did you say, 14%?

Yes.

Okay, I will go back in the queue. Thanks, guys.

Brad Hathaway, Far View Capital Management.

Good morning, so just a big picture question on MediaMiser. I understand why it is interesting from Innodata's perspective. I guess what I'm curious about is you have a company that has been relatively independent for several years based on what I read online, so I'm curious as to why did MediaMiser want to join Innodata. What does Innodata provide them that they either couldn't have done on their own or couldn't have done with someone else?

Of course, it would be better to have MediaMiser here to answer that question but I will tell you what they've told me, because I asked the same question. What they told me was that they looked at the kinds of things that we were able to do with our resource base, things that we were doing for customers who had some of the same needs that they had, and they came to recognize that to get the Company to the next level, they needed access to the global reach and the kinds of global resources that we have got.

So I think that is what propelled them in our direction. They are looking at the capabilities now to play in a much bigger sandbox and with many more toys and they -- a cost base that enables them to put more into sales and marketing and things like that. So that's what they have told me.

Do you mind elaborating a little more on what some of the specific kind of abilities you had that were so attractive to them?

Sure, I think they fall into two categories. One relates to production. In our content services segment, we do a lot of the things that MediaMiser does in Ottawa and there's an opportunity to leverage that as we grow.

The second thing is we've got a staff who has expertise in many of the technologies that they have built a staff to have expertise in and there's an ability there to share resources as well. So I think it's those types of capabilities that will then enable them to invest in a much more determined way in sales and marketing and product innovation, which they know they require. They've got ideas for.

Okay, so the idea is to basically (multiple speakers) -- sorry, go ahead.

This is O'Neil here. In addition to that, I think they are very excited to be able to leverage the offshore capability for lead generation and increasing the distribution, because the relevance of the product is not just merely in the markets here in the US and Canada but there is a relevance of these services, both in other parts of the world, including Asia and Europe. So to be able to leverage our global footprint was -- they found it attractive.

All right, that makes sense. I guess based on the articles you can read online, they clearly seem to be pretty loved by especially their Canadian customers. I haven't seen as much on the US customers, but I would assume it similar but doesn't seem to have much overseas presence so that definitely seems like something they could leverage off of your expertise.

Just I guess one final question on the background of this transaction. Did they -- did you approach them? Were they put up for sale? Were there other bidders? How did that kind of come about?

Brad, essentially where they were in terms of what they were looking for is a way to reach some kind of a strategic relationship with the Company that will help them to grow and they were running a process. We know; we have been keeping our eyes and ears open for good acquisitions that fit in well with our strategy. So as part of this process we came across this opportunity and this was one of the five deals out of the hundred deals that we looked at that appealed to us.

And the reason why we were able to reach to a successful outcome here is just the cultural fit that we saw between the management team and the Innodata team.

Okay. And just to be clear, where there other kind of bidders in a final round with you or --?

There were, yes. There were other bidders, but I think, fortunately, here the decision-making was in the hands of the management team as compared to some private equity or some other people deciding on behalf of the management team.

Okay, understand.

(multiple speakers) the main reason why we were able to achieve a successful outcome.

And I think, again from what I understand, we were somewhat unique in that we were not a consolidator. We were not looking to roll them up and send management packing. Instead, we were looking to re-fortify management with the capabilities they need to grow. And as I said before, they are hungry for that and I think they saw in partnering with us the opportunity to accomplish what they are looking to accomplish over the next few years.

Okay, great. Thanks.

Tim Clarkson, Van Clemens.

Good acquisition, good to see some growth. I see on your projections for the next quarter you are projecting I guess growth of, if you take kind of the midrange, about $1.5 million in growth for next quarter. Is that about right?

That's right.

Of that $1.5 million, would half of that be coming from the acquisition then?

That is right.

Okay. And then where would the other half be coming from just in -- would it be coming from the new enterprise stuff or it would be from the content services?

It's a combination of content services and some anticipated volume that we expect in IADS as well.

Now when Jack was talking about kind of the big picture he was talking about that you guys visualize at least getting up to maybe a $70 million run rate for next year and building on that, is that kind of the deal here is that hopefully you can be looking at another quarter of growth from here and beyond that pace minimally with opportunities to grow?

I think what we are -- the point that we wanted to make throughout everything that we are saying is how focused we are on growing the predictable and recurring component of our business. And work that -- either the deals that we have closed in Europe, which are highly valued, $10 million of recurring work per year, MediaMiser, Synodex, docGenix, all of that effort is geared to that.

In terms of looking out at 2015, we tried to provide a little bit of a snapshot of kind of what we have a level of visibility for and within that where there's a little bit of uncertainty. And then to paint a picture of what we are going to be looking hard to achieve in the latter part of this year, in essence we are looking to put wins on top of that so that we can increase that number and at the same time make sure that that number, everything that is a component of that is solidified.

Okay. You mentioned kind of a -- that you have a couple of big opportunities that haven't been signed yet but could be significant. Are any of those in the e-book area?

There are some big opportunities in the e-book area. We are seeing some interesting activities internationally that we are tracking and we are going to be aggressive about trying to reel those in.

And this is just in my own special interest; is there any movement yet to take e-books just from a simple conversion where you got the same material and its online to where you actually have enhanced e-books where it's really a more meaningful experience than just reading a paper book?

Yes, there is and we are most certainly involved in that. Within those efforts, several of which have been very prominent, there's a lot of fits and starts, so there are a lot of people who are looking to time the pace of innovation in that area. And I guess that's my way of saying from a technology and a capabilities perspective we are intending to stay current with those things, but we are not going to take too long of the bet on that. Most of the work that we are getting and the big work that we are tracking is still in more traditional types of books.

Right, right. And I'm guessing that being in the textbook area that you would probably see the initial, more sophisticated work being done.

Certainly there's a lot of innovation that is taking place there and there's some innovation that has started there that has gone more broad to other types of books as well, where there's a significant benefit to interactivity. And, again, we are playing in those things but we are going to be careful about extending ourselves too far. A lot of work remains to be done working with our key customers who have international expansion plans, for example.

Okay, great. Thanks. I'm done.

(Operator Instructions) Jay Harris, Axiom Capital.

Good morning, Jack. MediaMiser, I'm thinking from the comments you have made that the company was not profitable in its last fiscal year and the operating costs pretty much offset or were more than the gross profits. (multiple speakers) what --?

There was a small loss. Actually if you look at it on a quarterly basis, they did achieve profitability in the last quarter or two.

Okay, so the operating expenses were very close to the gross profits at 60% to 65% gross margin. What additional expenses will this business incur or will Innodata incur in pursuing MediaMiser's goals over the next year?

I'm going to let O'Neill answer that, but I will just start by saying we are going to be very judicious in terms of that. We are going to look for opportunities to self-fund some of those efforts and there's some planning needs to take place before we can give you a firm answer on that.

What do you mean by self-fund?

We're going to be looking for areas where we can help them with some of that growth. For example, we've got oftentimes idle capacity and idle capabilities that can be (multiple speakers).

I wasn't -- when I was asking the question about incremental costs, I wasn't -- I was ignoring accounting niceties that if you are spending $100,000 on their behalf it goes on their books. On a consolidated basis I'm wondering whether there will be incremental expenses.

Jay, I think the best way to probably understand the businesses -- and I'll take a moment to explain the business model. Essentially the way -- they provide services to their clients under multi-year agreements, which are essentially in the form of subscription fees. The way the business model is configured and the service model is structured is to produce about 60% gross margins. And in arriving at the 60% gross margins, probably variable contribution at the gross margin level is approximately about 70%.

At the SG&A level, there is a very high amount of operating leverage. They spend roughly about 15% in terms of variable selling costs in the first year, but that kind of drops significantly down for the sales person in the second year. So the business really enjoys a very high operating leverage.

Now what does this mean? If you really look at the business, because it's subscription-based revenues, you can measure this business in terms of the lifetime value of the customer franchise. So as the number of customers increase, you can take a certain multiplier of their revenues based on the lifetime value of those customers and arrive at the valuation. And the margins that come from them are pretty high.

So they are twofold, two things will happen. In a very static situation, $1 million of incremental revenues would produce somewhere between 55% to 60% contribution to the bottom line, but there will also be investments made to chase accelerated growth. And that investment should be considered in the context of the lifetime value of the customers that I talked about. So long as we are spending within 30% to 40% -- this is what most companies spend in terms of subsection business -- to acquire customers it produces and it will end up producing compelling value for our shareholders.

When you say expenditures, you are talking about operating expenses. It's a question; are you talking about operating expenses or are you talking about capital expenses?

Mostly operating expenses. The way the business currently is at the existing capacity --.

So should I think in terms of for every $1 million of incremental revenues a $150,000 increase in operating expenses?

There would be expense -- in operating expenses, yes. And in the cost of goods level take a 60% contribution and then from there you take operating expenses of 15%.

At the gross margin level, let's say the gross margin is 60%. If an incremental $1 million from what you said, I would assume or conclude that 15% of the cost of goods sold doesn't change or -- on that $1 million and 70% -- or, I'm sorry, 30% doesn't change and 70% grows, so the operating --. It sounds to me -- I'm asking you to correct this -- that the gross margin in the business will rise as the revenue business -- in the business rises.

That is the correct assumption to make. As the business scales, it will produce higher and higher operating margins.

No, I said gross margins.

Yes, it will, but there will be -- don't take that in terms of beyond 70% to 75% and that scale is important, because at different levels of scale we will see different benefits. But the gross margins will be in the range of between 60% to 70%.

Now Jack is -- Jack said -- I conclude from what Jack was saying that you have underutilized manpower and facilities so some of the incremental operating expenses will be provided by using -- for MediaMiser will be provided by using underutilized people's time in your organization.

Right. These are still early days. I think, Jay, what we are -- we will be working together with the MediaMiser team to come out with a strategy and we will share it with the investors over the next couple of quarters, here is why it just makes it extremely exciting and why we are so enthusiastic about it. There are several things.

One is the marketplace itself for this is growing, so there is this whole issue of how do we leverage our offshore capability to generate more leads? How do we improve our distribution? The second issue is how can we leverage Innodata's capabilities to go to our existing customer base and offer them what MediaMiser does?

The second thing is MediaMiser has also got a roadmap in terms of the evolving the product itself. Jack talked about the use cases increasing and it is fascinating to see how the use cases of creating value from public content is evolving. So how can we leverage the core technology that MediaMiser has built and the product that has been built to get into more use cases?

All this we need to spend time on and say what are we going to prioritize on, because the business model has been configured to produce a certain compelling results. So the advantage that MediaMiser gets from this relationship is leveraging all that we have from an offshore perspective and then saying this is what we will go after and focus on to accelerate growth.

Sounds like a very intriguing acquisition and I guess initially I look at it from the point of view that you have opened up a new avenue of growth for Innodata, paralleling what you are doing in Synodex and docGenix, etc., rather than a fully-integrated acquisition. It looks to me like it's a separate entity that will add a lot of growth to your business over the next few years.

Yes, we are extremely excited and I think there is another thing that we feel very good about. The great team that we get -- Jack talked about it in his prepared remarks -- Brett, Chris, Martin, and David, they complement each other. They proved that they can work together and they have created obviously a successful startup and they have configured a great business model.

When Jack and I we talked to a couple of customers, we were fascinated to see how a customer, which is one of the greatest known logos in corporate America, selected them as a customer -- sorry, as a vendor to an inbound -- that was an inbound lead for MediaMiser. They use MediaMiser to track the risk in their supply chain in terms of distress signals in real-time from what people are talking about their suppliers, because the information that they get from D&B reports and other places is late in terms of the sensitivity to make faster decisions.

So these are the different use cases that are evolving in terms of how to create value from public content and I think it offers a great opportunity for Innodata to grow as well, because essentially what we do for our existing publishers and information providers is repurpose content and then give it back to them to sell it to their customers. But this increases our game because now we are taking public content -- MediaMiser has already established relationship with almost 200,000 sources of public content -- and now we are repurposing that for businesses directly and selling it to businesses directly.

I think you guys are turning the ship around very nicely and positioning it for very good growth over the next five years. Thank you.

Thanks, Jay. We are excited and thanks for your support.

[James Tang], [Lusage Partners].

Just a quick question on RGA. Is any of the growth in content services coming from that customer and has the co-marketing initiative made any progress?

This is Jack. The RGA relationship that we -- that they have talked about and we have talked about is actually on the IADS side not on the Content Services side.

And the co-marketing initiative?

I'm sorry.

And the co-marketing initiative?

We are -- we have embarked upon it and it is going well.

Okay.

Charlie Pine, Van Clemens & Company.

Good morning, I just have a couple brief questions. Regarding the Synodex pipeline, where sort of things stand at the current time would you characterize the prospects pipeline presently being either equal to, greater than, or less than prior quarter?

Charlie, I guess the way I would categorize it in terms of value is greater than the prior quarter. Now a lot of what we are doing as we continue to build that pipeline is we are bringing in people to have conversations with us about what they need in our next release. And that is an important shift that we have been managing over the last several months.

So rather than being promotive and salesy in order to make sales, we've kind of shifted our strategy to make sales through listening real hard to what they need and making sure that we are -- our product is not just in the vicinity of what they need, but it is dead on bull's-eye in terms of what their requirement is. And we are finding that that conversation is working very well and is having the intended effect of increasing the numbers of people that are interested in working with us.

These 16 companies that were shown the mockup, were all of these companies 90 days ago in the pool of sort of live prospects that you felt at that time that you had a fairly high comfort level? Or has that number contracted or expanded?

No, the number has expanded, so we talked about how we attended the recent large conference. A good handful of new relationships came out of that conference, for example. And we have -- I believe that we've got meetings either -- we've got meetings planned with all of them. We have already had meetings with I think two or three of that handful. And again, we are bringing them into that vortex of helping us define exactly what Workflow 3 needs to be.

All right. And in general, once you release and have 3.0 out for general availability, these 16 or so companies that have looked at the mockups and appear to be fairly plausible prospects, when do you think -- what sort of timing do you feel --? Where would you be a timing curve as far as how long it would take to get either a yes or no out of these people?

I think we're going to be in a better position to answer that question come September after we have it in our hands and we are ready to do business with them and bring them into Workflow 3. It is a bit difficult to say now because, to a large extent, the timing has shifted to being in our court. So I think right now we are very heads down, getting it into their hands. Once we do that then we are going to shift into a mode of selling and forecasting closes, hopefully.

I would also -- could you just quickly review again? You kind of threw out the list of numbers on sort of a rough forecast for 2015. What was that break down again?

Sure. Again, I don't want to categorize it as a forecast. Really it's more to convey to investors strategically how we are thinking about the business and what we are looking to accomplish.

So the rough numbers were -- that we've got $40 million or so in recurring Content Services segment projects. Then we are looking at the possibility of being able to recognize as revenue maybe about half of the $10 million in new bookings from the European initiatives, so we call that $5 million or so. Beyond that we tend to have a reliable $15 million of project work that comes from recurring customers, so day-in/day-out work. Doesn't include the big black swan kind of initiatives that come in every now and then.

Beyond that, we have got $4 million of Synodex recurring revenue that we have contracted for, but as we have helped people understand, there are third-party consents and other approvals that are not in our control that will influence when we are recognizing that as revenue. But again, optimistically speaking, we are putting that into the soup as well. And then we've got the $4 million in MediaMiser recurring revenue.

So that is kind of the way we are looking at the business as we plan. Now in the second half of the year what we are looking to do is get Synodex 3 done. We are looking to do a relaunch of docGenix.

We've got a handful, actually, of things that are very interesting going on in content services. And we are going to be working hard at all of those things in order to further build the bookings base to enable us to go into 2015 from a position of strength and to then continue to build on the year as well.

Finally, on MediaMiser, you talked about -- you threw out some pretty big numbers as far as what broadly could be considered the spend in back of 2013 that was in this space. I guess I am more interested in knowing specifically where you see a year out or where the MediaMiser team sees a year out what truly is the targeted addressable market as far as what they could achieve or what is out there as far as a targeted addressable market in annual revenues for this service right now.

Sure. And I think what we will be doing over the next several conversations is increasingly giving you better visibility into that. Right now we are day one into the business (multiple speakers) there is a bunch of planning that we are going to be doing but (technical difficulty) sharing that with you.

It is our hope that we will be able to be a whole a more transparent and have a whole a more visibility into a business like that than we do in our traditional business lines that are more project-based. So I think will be a good conversation.

But you have that information now is what -- in other words, is what you are -- you're telling me you do have that information.

I'm not sure I understand. I think my understanding of your question was that you are looking forward to understanding what our growth plans are going to be on an annual basis for next year and the year after in the MediaMiser business. Or were you asking more about addressable market kind of --?

No, I was asking more about what the specific sort of addressable market is for MediaMiser, the specific MediaMiser service and product offering and what that market would be over, say, the next 12 months. What sort of target is this company shooting at?

Again, I'm going to give you more information in terms of what we are shooting at in the next call that we've got together. And after that, in terms of market intelligence, again I can -- be happy to forward you some of the information that shared and we can break that down further. In other words, we can go into the total spend and break it out in terms of media analytics, contact management, media monitoring.

Media monitoring and engagement, social, traditional, press release distribution, all of those play into that market and we would be happy to point you to some sources and send you some information about those subsegments.

Well, I guess I'd be happy to little more specificity instead of just hearing that back in 2013 $2.2 billion or $2.5 billion was spent on sort of these sort of -- a collection of amorphous related services of this nature and I'd like a little more specificity.

I hear you. We will be happy to share some third-party stuff with you and look forward to being more specific about our plans as we move forward.

Thank you.

[Edwin Fowler], [SmallCap Report].

You commented -- I just have three or four short questions. You commented on the June 3 annual meeting that you saw a pickup in the second-quarter business. How do you feel about that and what do you see now?

We definitely are -- as I said, there's a handful of very interesting and several very large opportunities that we are working on. I am not in a position to go into detail on those right now. That would be way premature, but there are some very interesting irons in the fire.

Okay. And the large German customer, as I understand it, I think I figured it out to be about 15% of your business now. But as I understand this, Innodata is going to take over their operations in Germany in digital publishing. This doesn't include e-books or does it?

I think that there is some activity within that in e-books, so they are producing content that is delivered across multiple platforms and e-books is a component of that.

We don't characterize that as an e-book opportunity, though. E-book opportunities tend to be one-time conversions in our business. This is taking over ongoing operations for a large company and creating efficiencies for them in operations and flexibility and delivering a whole lot of value.

So you are talking about over time, maybe three, four years, this is going to be somewhere around $50 million in business?

We are measuring it on an annualized basis and what we have visibility on right now is ramping up to an annualized $10 million per year. We are talking about five-year contracts, but we are going to be ramping into that $10 million over the course of the next three years. After five years, we would expect that business would continue if we are doing a good job and all things are like that. So I think the lifetime value of what we put in place is very, very significant.

And you talked about a German bank looking at docGenix. You are still working with the big New York bank?

Still working with the big New York bank and the new bank that came to us actually is not a -- I didn't say it was a German bank, but a European bank.

Okay. And last question; could you give us a little more color on the foreign language content progress -- Indian, Chinese, Portuguese, all kinds of other languages -- for content?

We've made a lot of progress on some new bookings this quarter in Russian language content, in French language interestingly, and we continue to expand capabilities in some of the other languages like Chinese as well.

Is this an opportunity to be as big as the English language?

Well, you know, we would be speculating right now. I think the important thing is that we put those capabilities in place. We've got several clients who are very interested in Chinese language not just in terms of e-books, but in terms of a wider spectrum of information products.

And when do you see Innodata becoming profitable?

You know, we are not giving guidance on that per se. We have given one quarter out guidance and right now what we are try to do is be real transparent about the efforts that we have got in place for achieving sustainable growth on recurring revenue. And obviously with operating leverage in our business, not to even mention the MediaMiser business, we feel very good that there will be a very direct and nonlinear relationship between the growth that we can achieve through these efforts and our profitability.

Sound like a good plan, Jack.

Thank you, appreciate your time.

Stan Berenshteyn, Sidoti.

Thank you, just a quick follow-up on the acquisition. The terms of the acquisition included a $4.6 million in earnouts. Can you provide us with some color on what the actual growth milestones need to take place in order for these payments to go through?

The top of the deal, which Jack talked about very briefly, are -- there is an upfront payment of approximately 5.4 -- something of the order of CAD5.7 million, which consists of CAD4.2 million in an upfront payment and a deferred payment of CAD1.5 million. The deferred payment is payable in two installments: one in 2015, July 2015, and one in July 2016. And then there is an earn out which is in April and May 2017 timeframe based on the revenue growth that will be achieved for the fiscal year ended March 2017.

There are minimum thresholds on that of achieving minimum revenues of CAD6 million and certainly would be a target. Assuming that minimum numbers are achieved, they get a revenue multiplier of 0.75 of the revenues in excess of the CAD6 million subject to a cap of CAD5 million. And the numbers that I am giving you are all in Canadian dollars.

Thank you.

That concludes today's Q&A session. I will turn the call over to Jack Abuhoff for any additional or closing remarks.

Thanks, operator. I guess just to recap a bit, on MediaMiser we are excited about the MediaMiser acquisition that we spoke about today and announced yesterday. It brings a strong subscription-based, recurring revenue, high margin, high retention rate business into the portfolio in a sector that we expect to be expanding.

On the Synodex side, we are also very optimistic. We are hard at work on our Synodex 3.0 release, which we believe is very responsive to the market's requirements. I am optimistic that its significant strengths and market alignment will enable us to accelerate bookings.

We are also working on a docGenix relaunch. We had some recent unsolicited interest that seems to validate the approach that we are taking. And we've also got some very interesting things cooking in the content services segment which I look forward to being able to talk about more in future calls. So for today thank you everybody for joining us and for your continuing support and interest.

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