Innodata Inc (INOD) 2015 Q3 法說會逐字稿

Good morning and welcome to the Innodata third-quarter 2015 earnings conference call. Today's conference is being recorded.

At this time I would like to turn the conference over to Amy Agress. 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'Neil first, who will provide a detailed review of our results for the third quarter, 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 limitation, 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 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 primarily at-will nature of contracts with our contract services clients and the ability of these clients to reduce, delay, or canceled projects, continuing Content Services segment revenue concentration in a limited number of clients; 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 could [rise] requirements for our services; difficulty in integrating and deriving synergies from acquisitions, joint ventures, and strategic investments; potential undiscovered liabilities of companies that we may 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, Amy. Good morning, everyone. Thank you for joining us today to review our third-quarter 2015 financial results.

Total revenue in the third quarter was $15,130,000, which was a sequential growth of 8% from $14,060,000 in the previous quarter. This $1.1 million growth was mainly in our Content Services business. Content Services' revenues increased to $13.5 million this quarter from $12.4 million in the previous quarter.

We had higher volumes and several one-time projects, including $600,000 in eBooks from a key customer. This growth does not include any substantial ramp up in the large European projects we won last year.

Moving over to IADS, revenues were $500,000 this quarter compared to $550,000 in Q2. DocGenix revenues were lower by $30,000 and Synodex revenues were lower by $20,000. Our Media Intelligence business reported a 3% increase to $1,180,000 compared to $1,150,000 in Q2.

MediaMiser added eight new customers this quarter, a record since our acquisition. And after netting of contract terminations, we ended the quarter with 119 customers on our MediaMiser platform, compared to 112 at the end of Q2. We continue to maintain a retention rate in excess of 90%.

Let us now look at our gross margins. Higher revenues combined with higher employee productivity and currency benefits fueled our gross margin expansion to $4.6 million, or 31% of revenues, from $3.1 million, or 22% of revenues, in Q2.

On a segment basis, gross margin in our Contract Services business was $4.6 million, or 34% of revenues, in Q3, compared to $3 million, or 25% of revenues, in the previous quarter. These margin figures are after absorbing labor costs in excess of revenues of $200,000 for some of the projects within our large European deal we announced in 2014.

Moving over to other segments. In IADS, losses were $500,000 this quarter compared to $450,000 in the previous quarter. And in our Media Intelligence business gross margins increase to $550,000, or 47% of revenues, this quarter compared to [$478,000], or 41% of revenues, in the previous quarter.

Excluding acquisition-related amortization expenses, gross margins in Media Intelligence trended higher to approximately 57% in Q3 from 53% in the previous quarter. We continue to rein in our selling, general, and administrative expenses, which were lower at $4 million this quarter compared to $4.3 million in the previous quarter. As a percentage of revenues, SG&A trended down to 26% compared to 30% last quarter.

On a segment basis, expenses were lower in Content Services by $200,000 at $2.8 million and they were also lower by $100,000 in IADS at $350,000. Expenses in the Media Intelligence segment remained consistent at $850,000 in both quarters.

Higher gross margins of $1.6 million and lower SG&A expenses of $300,000 helped in turning around our $1.2 million pretax loss last quarter to pretax earnings of $750,000 this quarter. The change was primarily in our Content Services business, which reported pretax earnings of $1.9 million this quarter, [related] to $100,000 in the previous quarter.

In the IADS segment, pretax losses were approximately $900,000 in both quarters. Media Intelligence supported pretax losses of $150,000 in the current quarter compared to $250,000 in the second quarter. These figures exclude amortization, acquisition-related amortization expenses of $150,000.

Moving down to taxes. Our tax expense this quarter was $450,000 compared to a tax benefit of $250,000 in Q2. The income tax expenses relate to our overseas subsidiaries and their earnings and the tax benefit last quarter was due to a successful resolution of two income tax disputes in India pertaining to prior years.

After adjusting for tax expenses and minority interests, net earnings this quarter were $400,000, or $0.02 per diluted share, compared to net losses of $800,000 in the previous quarter.

Let me now review our adjusted EBITDA and cash flows. In Q3, our adjusted EBITDA increased to $1.7 million from a $200,000 loss in Q2. Our adjusted EBITDA was the net result of a $2.7 million EBITDA in Content Services, offset by losses of $900,000 in IADS and $150,000 in Media Intelligence.

I will now review our balance sheet. We had cash and investments totaling $24.9 million at the end of Q3, compared to $23.7 million at the end of Q2. Of this, approximately $2.1 million was held in the US and the rest was held overseas by our international subsidiaries.

We generated $1.8 million of cash this quarter, compared to $1.6 million of cash used in operations last quarter. At the end of Q3 our Accounts Receivable trended lower by $700,000 to approximately $9.1 million, which, in terms of days sales outstanding, averaged at 62 days this quarter compared to 66 days in Q2.

CapEx was again light this quarter at $200,000. In addition, we incurred capital expenditures of $200,000 in Synodex, which we had funded through operating leases. Looking ahead, we expect CapEx to be in the range of $300,000 to $500,000 in Q4 2015.

I will now turn to currency changes and our foreign exchange hedging program. At the end of the third quarter we had $19 million in outstanding forward contracts to hedge our overseas exposure for both revenues and expenses. In Q3, on an average basis, the US dollar gained between 1% and 2% against the Philippine peso, the Indian rupee, and the Canadian dollar, and it lost 2% against the euro.

Based on mark to market, this resulted in a $300,000 notional loss on our outstanding hedges. According to the accounting policies, we recognize only loss and gains on mature contracts in the income statement.

Let me now review our guidance for Q4. We expect revenues to be in the range of $15.1 million to $15.7 million. The segment-wise breakdown is Content Services in the range of $13.4 million to $13.7 million; IADS between $600,000 and $800,000; and Media Intelligence between $1.1 million and $1.2 million.

This quarter's performance gives us a pretty good sense of our breakeven point, which is around $14.5 million to $15.5 million in quarterly revenues. Thank you and now I will pass the call over to Jack.

Thank you, O'Neil. Good morning, everyone. Thank you for joining us today.

O'Neil has just provided a detailed financial review of the quarter and our revenue outlook for Q4. I will now provide some additional insight into the business of each of our reporting segments, and I will begin with the Synodex division of IADS.

In Synodex, as we have discussed in our recent calls, our focus this year has been on acquiring clients for our Version 3 APS. Extract product, which we launched late in 2014. Regardless of whether we provide APS. Extract as a service or whether we license its underlying technology platform, we're generating recurring revenue, which is strategically important for us.

We internally estimate the value of recurring revenue contract or awarded based on what we anticipate its revenue will be in a consecutive 12-month period after ramp-up. We refer to this as annual contract value, or abbreviated ACV. Now, it is important to bear in mind that ACV is an estimate only, based on information a client or prospect shares with us, but actual revenue will often vary from our estimate, either up or down, based on actual volumes.

During the past three months we have booked or been awarded an additional $1.5 million of new annual contract value, bringing our total booked recurring revenue to approximately $6 million of annual contract value. The contracts that underlie these bookings have terms ranging from one year to five years, but we expect them to be recurring.

We just recently won a vigorously-contested RFP to become the chosen provider for a life insurance company that is ranked as one of the largest in the US. This win is strategically important because it underscores the strength of our data-driven solution in insurance underwriting.

The company is going to start with a one-year contract for about 13% of their volume. We will work hard to ensure that they get the value out of it that they anticipate, which should enable us to expand that account. At full requirement, the client has the potential to be worth in excess of $6 million per year in revenue with their life insurance division alone. And then there are other divisions that we may be able to penetrate as well.

Our strategic priorities for the Synodex business are: one, ramping up to clients whose business we have been awarded; two, advancing a priority pipeline of new active prospects with whom we see near-term bookings to be likely; and three, continuing to iterate our product.

I will start by addressing the first priority, ramping up clients whose business we have been awarded. This typically involves finalizing data and reporting specifications, syncing our systems to our client's systems, and resolving any client dependencies, such as software or hardware handshakes. Getting this done can take longer than expected, making it hard to forecast revenue in a particular period. And to illustrate this, last quarter at this time I predicted slightly higher Synodex revenue this quarter, but a couple of clients took a little longer than anticipated to get their systems ready.

But here is the important thing. While revenue is, of course, the endgame, the revenue will come, even if it takes a little longer than planned, so long as we continue to get awarded the business and continue to sign new deals.

On the subject of ramp-up, after many months of integration work we successfully launched John Hancock just last week. As you may recall, John Hancock, one of the world's most prestigious life insurance companies, announced in April that it would be strategically partnering with us, utilizing our services and licensing our technology platform. The launch was a great success and highly celebrated within Hancock. You can expect a formal announcement of the launch in the next several weeks, but I thought I would share the success with you today.

Our second strategic priority, second only to ramping up contract awards, is securing new bookings from a priority pipeline of active prospects that we think we have a good chance of closing in the near term and cultivating new pipeline. Some clients move slowly through the process; others move faster. There are any number of clients we could use to illustrate slow movement, but I now having an example of a brand-new client who broke the record for fast.

Just last week we received an email from a company stating that it had decided to move its requirements to us based on our reputation in the market and on a single meeting we had with them just recently. It is great to see that the word is getting out and that we are developing a solid reputation in the market. We are hopeful that this kind of short sales cycle is a harbinger of things to come that indeed, as a life insurance industry veteran once told me, the industry may be slow to lead, but it is fast to follow.

In terms of our Synodex-related loss this quarter, once we are ramped up on our current bookings and awards this loss would decrease to about $200,000. It would take another $1.5 million to $2 million of bookings that then convert to revenue to get us to breakeven. The exact number will be a function of how aggressively we are hiring and training new staff. We will continue to dial up and down hiring based on what we are seeing in the pipeline.

Now on the docGenix products side we continue to see interest from prospects in our new release of docGenix Analytics. We are also seeing interest from an existing customer in incremental add-on services. We are on schedule still for 2015 release of docGenix CREO, the companion platform for Analytics, which will be used by clients to generate new financial documents. Taken together, docGenix CREO and docGenix Analytics address the entire financial document lifecycle from document generation through archival and search, all while providing digital data to downstream systems that measure risk and manage collateral.

Now we think our timing is good here, because banks and hedge funds are facing a whole new set of regulatory requirements regarding collateral for derivatives contracts. These new regulatory requirements, commonly referred to as Basel III, will start to take effect in September 2016 and will continue to be phased in through 2019.

Now, if you are a bank or a hedge fund, the problem you face under these new regulations is that the collateral you post will no longer be a matter of private negotiation. Instead, it will be determined by the regulators and they are going to be making you go through a lot of hoops that could mean having a lot more of your assets, cash and securities, tied up as collateral.

So again, if you are a bank or a hedge fund, docGenix Analytics helps you in two ways. First, it enables you to comply more easily with the data collection reporting rules that are part of these new regulations, but in addition to this, by giving you a strong command and control over your collateral documentation and data, will enable you to preserve liquidity to the greatest extent possible as you comply with the new regs.

In anticipation of our service resonating well among banks and hedge funds who are faced with these new regs, we have started marketing docGenix services through a variety of channels. Our quarterly loss in docGenix is now approximately $200,000. Longer-term success will come once we acquire additional customers, but in the near term, we will work on driving revenue by providing extension services to existing customers and we will work on keeping our costs low.

I will now turn to our Content Services segment. Now, as O'Neil just mentioned, revenue in the Content Services segment was up by approximately $1 million in the third quarter, based on an uptick in volume from a key eBook customer and several project starts in both new and existing clients.

On our last call I mentioned that we had closed a $4.8 million contract with a new client for the creation of a new digital information product. In the past quarter, we completed our project planning phase and started production for this client.

We also made progress executing on an essentially threefold plan. First, continuing to build new technologies that are responsive to client demand for high-quality automated digital processing. Second, expanding our marketing around new platforms that we provide to clients on a SaaS basis to drive recurring revenue. And third, enhancing both how we engage our existing clients and how we engage new potential clients.

Presently, we have a sales organization that is responsible for both managing existing accounts and going after new ones. We believe that by viewing these as separate processes that require some fundamentally different skills there is scope to improve both.

As O'Neil mentioned, we made $2.7 million in EBITDA, or about 20%, in the quarter in Content Services. This was after absorbing approximately $200,000 in gestational losses on our new program, providing end-to-end publishing services to two divisions of a large European information company as we have had to hire and train staff in advance of taking over the work.

We are expecting the gestational losses on this program to shrink as we proceed to ramp-up over the next few months and to end the year at an annual run rate of approximately $4 million. We envision the ramp-up to $8 million on this recurring program to continue through 2016 and into 2017.

I will now turn to our Media Intelligence Solutions segment, which incorporates our MediaMiser and Bulldog Reporter properties. The Media Intelligence Solutions team concluded the quarter with total revenues of close to $1.2 million, slightly ahead of our internal budgets.

On a quarter-over-quarter basis, comparing this year to last, we have grown our Media Intelligence Solutions by 37% on a constant currency basis. In Q3, we booked new contracts in our Media Intelligence Solutions segment valued at approximately $400,000 and added eight net new customers for MediaMiser's flagship products. Included in these wins is a leading pharmaceutical company, a large healthcare services company, and a bank.

It is gratifying that we are winning business and competitive buying processes on the combined strengths of our technology platform and our editorially enriched analysis services. We now have 119 customers on our flagship MediaMiser platform, compared to 112 at the end of the second quarter.

To achieve our growth aspirations, we have invested principally in two areas: product development as well as marketing and lead generation. In Q3, in terms of product and lead gen, we continue to seek month-to-month increases across key leading indicators including web traffic page views and unique visitors, inbound sales leads, and demos scheduled and performed.

One of the creating marketing techniques we are using is to produce some very compelling infographics on current topics that our analysis teams cover, which we then contribute to major news sources to get our brand mentioned. So we were thrilled to see these infographics referenced this quarter in some leading news sources including The Financial Times, Reuters, and Business Insider.

In Q3, as a result of these new content marketing and lead-gen programs, we had a record 196 sales leads for MediaMiser's flagship products, compared to last quarter in which we set our previous record of 107 sales leads. We also scheduled a record 95 demos, beating the record we set last quarter of 50 scheduled demos. The scheduled demos are with a good mix of large- and medium-sized enterprises, including some Fortune 1000 companies and government entities.

Our adjusted EBITDA loss in this segment was $150,000 this quarter. We expect that an additional $300,000 of quarterly revenue will enable us to break even, which we aim to accomplish by mid next year. After that we expect that the business model will scale with gross margins of 55% to 60% and approximately 30% net marginal profit contribution after investing 30% of those revenues in additional sales and marketing to further accelerate growth.

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

(Operator Instructions) Tim Clarkson, Van Clemens.

When I saw that $0.02 profit I thought it was a misprint.

Glad to presently surprise.

He wanted to surprise you, Tim.

Yes, I told -- my wife asked me, well, what do you want for your birthday? I said a good report from Innodata. So --.

Well, happy birthday.

And we have been working hard at it.

Yes, yes. Well, good job. Anyhow, Jack, could you just give some more color? You were telling me privately about one of your experiences with a life insurance company and how they called you in and started lecturing you about how important this digital data analysis is to the life insurance.

Could you just give some more color on maybe that experience you had and some of the other experiences that validate that you think that your -- that we are spending money in the right area?

Sure. Well, you know, Tim, I think -- I don't remember the exact anecdote that you may recall because there are so many of them. We are regularly having meetings where what we are doing seems very on point.

The life insurers are -- the vast majority of the large ones certainly have big data initiatives in place and they are actively thinking about how do they reinvent their business? How do they grow their businesses? And they see a lot of value in just that in big data and looking at digital data: ways that they can automate existing processes, ways that they can turn things around quicker, ways that they can appeal to broader markets. And what we are doing here is really resonating.

Are the five customers that you are actually working with, Jack, are they starting to get the benefits that you have been claiming that are out there?

They are. And one of the most immediate benefits they get is efficiency; they can get their work done for less. And one of the then immediately following benefits of that is what they call mortality gains, which basically means doing a better job underwriting.

They are able to -- their underwriters are able to spend a little bit more time in analysis and the digital data enables that. They are having to do less hand calculations. They are having to do less -- fewer lookups. The impairments that they need to think about are right there and those have been pre-analyzed in conjunction with their requirements in their underwriting manuals.

It is having a great deal of benefits immediately and then it also has those down-the-line strategic benefits that get the C-level folks excited.

Right. How about in terms of speed? I mean are you able to get a life insurance deal out there faster than the older methods?

You know, it is an industry that does move slow, Tim. I don't know that there is going to be any way to change that. They are careful; they are detail oriented. We are talking about bringing them fundamentally a new way of working.

That said, as I mentioned a few minutes ago, we had a client who recently closed very quickly and reinvented our notion of what a short sales cycle could be.

(multiple speakers) What I am asking about is in terms of the actual -- let's say that I want to get a $1 million life insurance policy and I go through the old process and it takes two, three weeks. I know one of benefits is that you claim that you could get a bid finished and declared and out to a salesman in a lot less time. Is that actually happening?

I think that they are seeing a lot of different benefits. I think that is one of the benefits of certain of our new initiatives. I think with the existing product and the things that we are working on, what we are talking about is some level of shorting that sales cycle, just as you said; that is right. And in addition to that lowering cost of operations and improving the way that the risk is assessed.

And in this environment where interest rates are low, companies are going to lose money or make money. Not on float, but on risk assessment. They see that and they value this new way of working. Cycle time, just like you are saying, is an important contributor, too. So what we are seeing is that we can appeal on any number of levels and the advantages that we bring end up resonating in a large number of these clients.

The five customers that you are working with so far, they feel like you are doing a good job?

And the five customers that we are working with feel we are doing a very good job. They are very, very happy with the service they are getting and the benefits they are deriving. And that really gives us a lot of fuel for encouragement as we proceed to launch our version 4 this December, which even aligns more closely with where they are going and what they would like us to be for them.

We have got a large number of what we refer to as our priority pipeline are people that are kind of waiting for that version 4. They have seen the mock ups of it. They get it, they understand it; and they said, as soon as you have that ready, we want another meeting or we want to ramp up to that.

Also, some of the bookings that we have to-date are people that are waiting to start when that version 4 is released. So they have committed on the basis of version 3, but they want to start with version 4. So that will be an important milestone.

When will version 4 be ready you think?

It is kind of ready now. It will certainly be -- we are aiming for the next month or so.

Okay. All right, I'm good, thanks.

Joe Furst, Furst Associates.

Good morning, gentlemen. Congratulations on the progress you are making. It is nice to see a profit, as Tim said.

Getting back to the question that you thought Tim had asked, I think last quarter you said there was something like 20 to 25 people that you were seriously talking to at about five or more advanced stages but it seems like you have only been able to close one. And the progress here just seem painstakingly slow.

I wondered can you address that a little bit. Why is it so slow? Because everybody seems to love their product and everything else, but you just don't seem to get signed contracts. Can you expand on that a little bit?

Well, in the quarter we signed, as we said, about $1.5 million worth of new work. There are three new signings within that, but one of them is very, very small.

I think, in terms of the slowness of the process, that is something that, as I just mentioned to Tim, is it is characteristic of the industry. We think maybe that will speed up as we have customers who are now working on the platform. But what we also see is that some of the large customers are probably going to stick their toe in the water first.

One of the three contracts we signed this quarter, or signed recently, was with a very large company who likes a lot what they see. They are very excited about it. So they are going to start with about 13% of their volume this year and see how it goes.

That is the nature of the business and we are prepared to work with it. I think we have adjusted our sales process to comply with that. We have adjusted our onboarding process to comport with that as well.

The important thing is, at the end of the day, what we are bringing on is what we think will be a very durable, recurring, profitable revenue base. And that will inure tremendous benefits to our shareholders.

But you haven't had potential clients say, no, I don't care about this; I have no interest? It is just they keep going on and on and waiting, like I said, waiting for the next version and so on? It is not people saying, no, I don't want to have anything to do with this?

That is correct. I think in all of the clients we have talked to -- recently there was one who said I don't really get that, but they are a small shop out somewhere in the foothills of Virginia or something. Things like that.

But the big players and everybody else, they seem to get it. They like it and I am predicting that we have more clients coming on over the next several months.

Good. Well, thank you. Keep up the progress, thanks.

Edwin (sic) Fowler, NBC Securities.

Good morning. It is nice to see the revenues picking up and a nice profit there. I just have three or four questions that you can update us on.

In your transcript, which I just finished reading again from last quarter, you mentioned I think it was John Hancock wanted to license your software, but I think I read that there are several other prospects that want to license your software. Does this -- it helps the client I guess to keep it in house. But is it better for Innodata to just give them the software and let them do it, or does it allow you to keep tabs on them?

Sure. So we are certainly not in the business of keeping tabs on them, but in terms of whether it is a technology license or a service that we are providing, they are both good business for us. They're profitable. John Hancock actually is a hybrid of both service and license, and we see that as a very compelling model. Getting a lot of value to people for whom having some of the internal capability is a good thing.

From a margin perspective, I think we will do well in either case. And we are happy to deploy it any way the client prefers.

Also in the transcript it was mentioned a pilot program with a new client to complete in September 2015. How is that going?

Went very well. They like very much the results of it. It was beyond their expectations, according to the conversations that we have had with them, and they are going to wait for to see what they get with version 4. And then we have meetings scheduled around version 4 to bring them up on that.

And also was mentioned the phase two of a proof-of-concept with a large insurer. Is that proof-of-concept coming to fruition?

You know that also went very well and there there was an RFP contest also pretty vigorously contested. And we think we are in a very solid position to be awarded that RFP also.

Also was the extraction solution, the John Hancock APS extraction solution. You went to some conference and you had 15 potential prospects relating to kind of like what John Hancock -- publicity you got from that. Is that something you are working on? Was that a surprise to you at the conference?

It wasn't a surprise. I think that what we are doing continues to resonate well, but I think one of the things we have discussed and we continue to discuss is things do move slowly. And just because you are adding new people to the pipeline doesn't mean they are going to close real fast.

So one of the important things we are doing from a strategy perspective is carefully prioritizing. We are putting our best resources around the things that we think have the best near-term potential. At the same time, we're cultivating everything else we are bringing into the pipeline. But we want to make sure we keep our eye on the ball here and I think we're doing a good job of that.

Also it was mentioned that last quarter there was $200,000 lost in the work with the European publisher and you've obviously moved ahead on that. You had some ramp-up costs. Did anything come in from that company in the third quarter?

You know, there is -- the revenue trickle is still small, but we really are looking at that as a 2016 significant ramp-up. So we think we are in good shape there. The client has had a number of delays on its side, which are largely being or have been worked through. And we are going to start getting revenue relief I think in the fourth quarter and then that will continue into 2016.

That's good.

Yes.

That is part of your revenue numbers of your guidance?

Yes, you know, we are baking everything in. Doing the best to make guesstimates in terms of timing as we can, of course, and trying to be a little bit conservative.

How are you coming with Pearson Learning and the new Xenon product? Anything there?

You know I think -- excuse me, I think better to talk generically really about the product. I think Xenon has promise. We are addressing what is, for us, a large new market with associations, trade and professional associations, and what we are bringing them is pretty compelling.

They've had strong membership for many, many decades, but with new ways of people collaborating, new social platforms, the Facebooks and LinkedIns of the world, those threaten really the value proposition that an association brings. So what we are bringing them with Xenon is an ability to get a lot closer to their customers. Rather than sending out all of their publications in print and in the mail and what-not, they can use our platform, which is an Apple-like, bookshelf-like platform, to distribute that.

And what they get on the backend is the ability to really understand their customers, to understand how the customers are using the content. To enable them to communicate with each other and share concepts and ideas to figure out what is resonating. To be able to make recommendations; if you like this, you should also like that.

So they are seeing it as a potentially strategic, important play for them to stay relevant and stay close to their customer base. And that is exciting.

How do you see Content Services coming in in the fourth quarter? Is that continuing to be steady? Different languages, different publishers, that kind of thing?

You know, I think -- you heard O'Neil's guidance there for -- revenue $13.4 million to $13.7 million, so it looks steady from a revenue perspective. Now, of course strategically we know that there are projects in Content Services and those bounce around a little bit. That is why we are making all of the investments we are making on things that are SaaS-based solutions that bring us recurring revenue and good solid forward visibility.

But Content Services is a great business, we have got a great client base there that values what we do and it continues to be a strategically important element of what we are doing as well.

And you are moving ahead with that venture capital firm in Content Services?

Sorry, I am not sure what you are referring to.

I think last quarter you said you had a new client in Contact Services; they're a venture capital firm.

Oh, okay. Yes, they are not a venture capital firm themselves; they are an information provider, but they are venture capital financed. And I mentioned that just to make sure that I communicated that it was a very important contract for us, valued at $4.8 million as a project, but it is with an early-stage company who is venture funded at this point.

Okay. Thank you, Jack.

George Melas, MKH Management.

Congratulations, I hope it is a real inflection point. O'Neil, can you try to help us understand the currency impact on the sequential profit improvement in the quarter?

Right. George, the way we model and the way we take hedges, the fundamental objective of taking hedges is to provide predictability in the future results. So invariably the way you should look at the hedges is if there is change in the exchange rate, we either gain or lose on the gross margin level, but the hedges play a compromising role. They mitigate the impact.

So if we gain on the currency and it improves our gross margin, then, to the extent that we have hedges, we may lose on the hedges during the quarter. So essentially we will see predictability and what we're trying to do is run our content business in the way that we achieve between 30% to 35% in gross margin. And that range is fundamentally because of operating leverage. And the target for the IADS business is somewhere between 35% to 40%.

Does that help?

It helps a little bit. You helped me with the mechanics of it. But in terms of precisely is this quarter on a sequential basis, I think what you are saying -- and I think you mentioned the currency changes, at least the change in the dollar versus some of your key currencies -- was fairly modest. So the impact then on the gross profit and also as mitigated by the hedges was relatively modest. Is that a fair way to look at it?

That is right. And what we do is we track specifically the impact of the hedges during the quarter that kind of gives us a sense of the division that is taking place because of exchange. And during the quarter we had $300,000 gain because of revaluations, which is a combination of both the hedging gains plus the current assets when they get translated.

Okay.

Does that make sense?

That $300,000 gain, does it flow through the P&L or --

Yes, that is right.

-- not quite yet?

That is right. And that is -- normally that happens at the gross margin level.

Okay. And was there something then from the hedge perspective that mitigated that $300,000, or is that a net number?

No, that is actually the gain attributable to the hedges.

Okay.

The exchange would have moved the other way, so the net impact on the P&L would be neutral. Maybe I can sit offline with you and tell you exactly how it works.

Great, okay. I would appreciate that. I am kind of slow on these things. Okay.

Jack, that contract, the $4.8 million contract that you were discussing with the previous caller, did you recognize -- I think you said you recognized -- you started to recognize some revenue in September quarter. Is that right?

I don't think so. What we -- we got through project planning and we initiated the project, but I don't think there was any revenue in the quarter.

Okay, great. And do you expect some revenue then to be recognized in the December quarter there?

We do, that is right.

Okay, great. And is the large European publisher -- I think you mention the number $4 million and $8 million. I think $8 million is the rate in -- at the end of 2017. How do you expect it to ramp in 2016?

I don't have a number for you on that right now, George. I think what we did say, though, is that we expect to be at around a $4 million annualized by the end of the year. And then for ramp-up to continue through 2016 and 2017 to what is now an $8 million target.

I do not have handy a number for what that will be in (technical difficulty) 2016.

But, Jack, the $4 million run rate, that is by the end of 2015?

That is our target.

Okay. And at that level would you still have cost in excess of revenue or does it reach that -- the two lines cross and it gets to break even?

There are a lot of moving pieces there in terms of teams that we still have training and then also learning curves. Even after they have started producing there are some learning curve. On top of that there are integration costs and some systems build-related costs that are in there. Again, I think we are going to have to defer your question on that.

Okay.

But if you want to drill down more on that we certainly can.

Okay. And then I have just one final question. You mentioned that that large life insurer that was very happy with the test or the pilots that you guys did; so they have moved the process to the RFP. How many people would be bidding on this RFP? And how many of these bidders really have your sort of automated capabilities?

They don't tell us how many are bidding, but you know we end up getting a sense of it. My sense is that there is probably about somewhere in the area of a handful of players that are bidding. Based on what we hear from customers, there aren't any other competitors who have our capabilities and strengths in digital data and that is a distinguishing competitive advantage that we enjoy.

So, in a way, are they sort of doing their pilot first and then moving to the RFP as a way to sort of test your capability and then be able to write the RFP around what you can do?

You know, I think that that -- at the risk of sounding arrogant, I think that may be right. I think they are very intrigued by what we can do, but they are purchasing -- and very pleased with what they see. But their procurement departments have policies and a lot of times that policy is, before they make an important strategic commitment or big dollar commitment, they are going to test the market and make sure that the assessment has been appropriate.

So we expect that to occur; it is occurring. But as we discussed just today, we have prevailed on a major RFP with a very, very large company -- one of the largest -- and we expect that that will likely be the case with the other one that you are referring to. We are hopeful. We will knock on wood, as they say.

Okay. We will knock on wood as well here right now.

And then just one final question on Media Intelligence. You are signing a lot of new customers; the revenue is not ramping up very quickly. Is it because you are -- are those fairly small customers that you are signing up? Or you talked about the churn being sort of normal and retention being 90%. Was it slightly higher in this quarter or maybe the previous one?

There was a little bit of an aberration in the last quarter in terms of a couple of clients that consolidated. So nobody left us, but one company bought another company and then there is a little short-term revenue impact, but there is also a larger opportunity that we are pursuing there.

I think the marketing now is several months old. What is really encouraging there is, like we said last quarter, we hit record levels of lead gen and demos last quarter and now we have doubled those to create new records. That needs to work through the system, probably a six -- we just call it a six-month sales cycle. That is probably about right. And I think we are going to start to see the revenue uplift from that as we go forward.

And, George, to add a little bit more color to what Jack said, so that you guys understand how the business works, the revenues flow in depending also on the timing of the client signings. So when a client signs on during the quarter, depending on when they signed on during the quarter, the revenues normally would be -- we will see the benefit in the following quarter.

And then there is about approximately 20% of the revenues, which is special analysis reports that the clients asked for. So when they are on our platform there are different use cases that come up and the clients will ask for a special analysis report. That is a (inaudible) [enrichment] services that we provide, analysis services.

Now that can cause some fluctuation from time to time in the revenues. I think the key metric that investors should look for is the rate at which we are adding customers. Because the more customers we are adding and the more we are getting at the top of the funnel, it is an indication of how the business will eventually grow and scale.

But in the short term be prepared, you will not -- don't try to mathematically extrapolate it has to be nice, beautiful, 10% every quarter sequential. It is -- that is unlikely to -- you will disappoint yourself if you see it that way. But at this scale, at this level, over the period of time as we keep adding the number of customers and it builds up a certain element of critical mass, yes, that is what we are targeting to achieve on an annual basis.

Okay. And then just one final comment, especially for O'Neil and Raj. I think the transparency of the numbers that you provide is remarkable, so I just want to say I really appreciate that.

Oh, thank you. We actually appreciate the feedback. We spent a fair amount of time understanding exactly your needs and our goal is to provide you the information. We look at the business so that you can make good decisions.

Okay, thank you.

Madhu Kodali, Yaksha Capital.

Jack, just a recap, three years ago or so you had a goal of building the Company to $100 million plus and you have been investing into this IADS division and did this acquisition with MediaMiser. Just trying to understand where you are in that thought process and your goals from that point on.

Is it still the same goal? How are you going to reach it? What is your outlook for the next two to three years?

You know, I think that our goal is obviously still to grow the Company. That said, we put that goal out there and we were not successful at reaching it. Some of what we are doing is taking longer than we thought that it would. The kind of innovation that we are engaged in is tough to time and I think we learned our lesson from that.

So, yes, our goal is to grow aggressively. Yes, looking forward to hitting and surpassing $100 million mark, but I won't make the same mistake I made then, arguably, by trying to time exactly when it will occur. The important thing I think for us to focus on is execution.

And what we are trying to do is share with you the important leading economic indicators that show that we are being successful there: the number of customers we are bringing onto MediaMiser, the number of bookings that we are having with Synodex, the projects that we are closing, and the things that we're doing in Content Services. I think that all will combine to create growth. And I am feeling good about it today and the results we are getting, and I am feeling good about the traction that we are getting across the businesses.

Right. And in that context, what is your current sales plan in terms of number of sales people you have and what is the split or breakdown on how many people are focusing on content versus IADS at this point?

Sure. We keep those separate. We have got a sales team of five or six people on the content side. On the Synodex side, we have got a couple of people who are purely market-facing, but really all of us are contributing to that.

The folks on the product side are very involved with customers. I get involved with customers, so it is a team effort. I think you shouldn't think about it as how many sales feet on the street at this point in the business. Maybe we will get there, but right now it is very much a concerted effort among the entire team to onboard clients.

Okay. And the content side, how much effort is going in from the top management in terms of developing new business or --? For example, in the past you were hoping that you would get some opportunities in the eBook business in international market, multiple languages and so on. It doesn't look like that panned out.

Is that still an opportunity you are pursuing or is that something you have given up and moving on to the IADS now?

Okay. No, it has panned out actually. The reason that we continue to have strong eBook revenues is because we successfully expanded to be able to do work in Chinese and Japanese and a whole host of European languages and such. And that is very much continuing.

Now the challenge in an eBook business, as I have said before, is once we create an eBook and let's say we sell that for $150 or something like that to a publisher or to a platform, they are selling those copies of that continually. If it is a best seller, they are selling millions of copies, arguably. But we are done. So it is very much a project-based business.

We are executing it well to the extent that we can. We are doing great work for great companies and we have expanded; we are hitting those other languages. But it is a project-based business and that is -- for that reason we are growing other businesses that have recurring revenue.

What percentage of revenue currently comes from eBook business? What is the run rate right now?

O'Neil, do you have that?

It is 14%.

14%. Okay. Thank you, that is it for me.

Edwin (sic) Fowler, NBC Securities.

Sorry to come back, I have been listening very intensely here. Just wanted to -- it is not the right word, but get a little color on this IADS life insurance underwritings.

You have five clients right now. Could you give us a little idea as to -- I know they have taken a long time, but how many policies has IADS done for all of your five clients? So that I have a reference in the future as to the number of policies. And where do you see it in 2016 from 2015?

Sure. First, Ed, you are always welcome back in line in the queue, so no need to apologize for that.

In terms of policies, we don't measure it that way for a couple of reasons. One is we don't work on policies. What we are working on is certain evidence used to make an underwriting decision for an application. So policies would be the wrong way to track it.

I think the best way to track it really is in terms of our bookings. I don't see a more useful number than what we are getting awarded and what we are bringing to the table in terms of bookings.

And last quarter the word disability was mentioned, disability policies. Is that something you are focusing on rather than life insurance only?

Well, no. We are primarily focused on life underwriting right now, but we do see an interesting market opportunity in disability and maybe also in property and casualty.

We have had meetings on that. We are working with a couple of clients in kind of modeling that, but that has not been a priority. We have got a -- we don't have a huge team here of product development folks and we have had them very much focused on the John Hancock launch and workflow 4. The disability product and P&C will kind of take a priority right after that.

And where do you see docGen coming in with your two products there? You keep talking about the regulations going in and certainly the big banks are probably looking to get more data to stay with the Basel II or III. Is this something that is going to come quickly or is it going to take a couple years?

It's a very good question. I would not expect it to come quickly. I think if I repeated that expectation we would end up being disappointed.

How long will it take is hard to say. Now, if Basel is a driver, we know that the requirements will role in starting September 1 through 2016. We are working with a couple of people who are thinking about that now and we know that there will be a lot of others thinking about it early next year.

So in a business, of course, we look for drivers like that. We look for factors that will create a compelling reason for people to have to move quickly and we think this may be one. But it is a new business for us. We are talking about fundamental change in large organizations and I don't think any of us should think that that comes fast.

Currently, derivatives contracts -- I mean it is a big market. But how are these banks and underwriters tracking the derivatives now in the form of digitization, etc., etc.?

What we see now is they maintain images in an image repository. And the problem with that is that when they need to know the data from a contract, they need to pull up the image, they need a lawyer or a team of lawyers to go through it, pull out data points. Sometimes they proactively do it, sometimes they are having teams of lawyers or paralegals type things into Excel sheets that they use.

But the problem with all of that is that -- well, there are a lot of problems: the names of counterparties change, collateral comes in and out, the contracts get amended, new derivatives get added on to contracts. It is a whole soup and it is complex and it is hard to manage.

What we do is we simplify that and we enable banks to have immediate access to the current version of any one of these contracts. Now on top of that what we see in Basel III is they are going to be needing to report on initial and various margin requirements on all their non-cleared derivatives and that is going to create a whole additional burden on top of what I just referred to.

A burden in terms of regulatory reporting, but also a burden in terms of how do they manage collateral? How do they make sure that -- even though the regulators are requiring that they maintain more margin in order to derisk the system, how do they make sure they are not over doing it? Because the more liquidity they have in their cash and securities, the more money they can make. So we see that as another reason.

And again, the banks that we are having conversations with A) they get it. They are making significant changes to their systems and their processes and to their documentation strategies, so we are hoping that we will be able to get some traction there.

Last question. You just mentioned banks. Are you talking about one or two or three or five?

In terms of banks who will be regulated by Basel III regulations or in terms (multiple speakers)?

No, looking into your docGen product?

Okay, yes. It is about a handful of banks and then some hedge funds as well.

Thank you, Jack.

(Operator Instructions) We have no further questions in queue. I will turn the conference back to Jack Abuhoff for any additional or closing remarks.

Thank you, operator. I guess you know Synodex we have got $6 million of annual contract value that has been awarded to date. We are glad to see that.

We won a hotly-contested RFP with what is one of the largest US life insurance companies. In our first year of that partnership we are expecting to process about 13% of their potential requirements, but we will be setting our sights on really delighting them with our product. They are already delighted, but they want to see the proof is in the pudding. Delighting them with our products so that we can grow that account further.

We launched John Hancock on our platform just this past week and all is going very well on that front. I'm hoping that we will be making a formal announcement of that launch in the next few weeks.

On the Content Services side, revenue was up close to $1.1 million in the quarter based on project load, which is always a good thing. In Media Intelligence, our digital content marketing and lead-gen programs are working well. Through a combination of new customer acquisition and expansion of services for our existing customers, our goal is to achieve a 40% annual growth rate near term.

So stepping back and kind of to sum it all up, we are encouraged by what is going on. We feel we are making steady progress on all fronts: in Content Services, our historical business and a business that continues to hold much promise, and also in our new IADS businesses and Media Intelligence business. These new businesses are SaaS-based businesses that we expect will be durable. We expect will scale with high gross margins and have predictable performance, all of which will make them truly valuable businesses.

So thank you, everyone, for joining us on today's call; for your continued support and interest. And I'll look forward to talking with you all soon.

Ladies and gentlemen, today's conference is available for replay by dialing 719-457-0820 or 888-203-1112. Passcode 7598892. (Operator Instructions)

That concludes today's conference. You may now disconnect.