Innodata Inc (INOD) 2016 Q3 法說會逐字稿

Good morning and welcome to the Innodata third-quarter 2016 earnings call. Today's conference is being recorded.

At this time I would like to turn the conference over to Amy Agress. Please go ahead, ma'am.

Thank you, Priscilla. 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 a detailed review of 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 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 that our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects; continuing Digital Data Solutions segment revenue concentration in a limited number of clients; inability to replace projects that are completed, canceled or reduced; depressed market conditions; changes in a external market factors; the ability and willingness of our clients and prospective clients to execute business plans which give rise to requirements for our services; difficulty in integrating and deriving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses 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 financial performance for the third-quarter 2016.

I will start with the background before reviewing the financials. On July 14 we completed the acquisition of Agility from PR Newswire. So this quarter's financials reflect the contributions of Agility under the Media Intelligence segment.

In the third quarter our results were impacted by certain one-time expenses. These include a $220,000 general and administrative expense in Digital Data Solutions that relate to an investigation that we had mentioned previously.

In the Media Intelligence segment, these include $360,000 of restructuring and integration costs for Agility. Of this amount, approximately $120,000 was accounted under cost of goods sold and the balance under SG&A expenses. As a result of the acquisition of Agility and its integration with MediaMiser we amended the terms of supplemental purchase consideration under MediaMiser's share purchase agreement.

Prior to the amendment the amount of payment was to be based on future financial results subject to a cap of $3.8 billion. The amendment fixed the payments at $1.5 million to be paid in two equal installments in March 2017 and March 2018 subject to certain conditions.

We have retained the option to pay up to 70% of the supplemental consideration in Innodata stock. To account for the supplemental consideration, we took a charge for a net expense of approximately $1 million after offsetting a $500,000 reserve in the books. This quarter we also earned a one-time revenue of approximately $240,000 in connection with the Agility purchase transaction.

My remarks on competitive results for both Q3 and Q2 exclude the effect of these one-time special expenses and income as I will indicate. Excluding the impact of one-time revenue, total revenue in the third quarter was $15.8 million compared to $15.6 million last quarter.

On a segment basis, Digital Data Solutions revenues were $12.1 million this quarter compared to $13.2 million last quarter. Revenues were lower primarily because of a $700,000 decline in volume from a key e-book customer and $450,000 on account of price and volume reductions on certain projects. IADS revenues were $1 million compared to $1.2 million last quarter, which was primarily on account of lower revenues of $160,000 in docGenix.

In our Media Intelligence business revenues were $2.7 million compared to $1.2 million last quarter. Agility accounted for approximately $1.6 million of these revenues.

At the end of September we had a total of approximately 1,461 customers on our combined MediaMiser and Agility platform. Of these, 812 were in the US and 649 in the UK.

I will now review the gross margins excluding the effect of one-time expenses and one-time revenues that I discussed earlier. Consolidated gross margins were $3.8 million this quarter or 24% of revenues compared to $4.2 million or 28% of revenues in the prior quarter.

At the segment level the gross margin in our Digital Data Solutions business was $2.5 million or 20% of revenues compared to $3.7 million or 28% of revenues in the prior quarter. Margins were lower primarily because of the $1.1 million reduction in revenues mentioned earlier.

In IADS lower revenues and a $100,000 increase in cost due to new hires resulted in a gross margin deficit of $300,000 this quarter compared to a breakeven last quarter. And in our Media Intelligence business gross margin, excluding one-time expenses and acquisition-related amortization expenses, increased to $1.6 million 58% of revenues this quarter compared to $600,000 or 48% of revenues in the second quarter.

I will now drill down to SG&A expenses and again exclude the one-time expenses I mentioned at the beginning of my remarks. Our total expenses increased by $300,000 to $4.6 million compared to compared to $4.3 million last quarter. This increase is attributable to inclusion of Agility's SG&A expenses of $350,000, offset by lower expenses of $70,000 in IADS.

SG&A expenses in Digital Data Solutions were flat at $3.1 million this quarter. In IADS the spend was slightly lower at $270,000 compared to $350,000 in the last quarter. In Media Intelligence segment our expenses increased by $350,000 to $1.3 million compared to $900,000 last quarter as a result of the inclusion of Agility following its acquisition.

Moving down to pretax earnings, our pretax losses, excluding one-time expenses and one-time revenues I mentioned earlier, were $900,000 compared to $90,000 in the previous quarter. Lower gross margins of $450,000 and higher SG&A expenses of $350,000 contributed to this $800,000 decline in pretax earnings. Our adjusted EBITDA, excluding one-time expenses and one-time revenues, was negative $50,000 compared to $700,000 in the last quarter and was comprised of $200,000 adjusted EBITDA in Digital Data Solutions and $350,000 in Media Intelligence offset by a $550,000 loss in IADS.

Moving over to net earnings, income tax and profits owned by offshore subsidiaries was $350,000 this quarter compared to $300,000 last quarter. After deducting tax expenses and minority interest our net loss excluding one-time expenses and one-time revenue was $1.1 million this quarter compared to $250,000 in the previous quarter.

Our cash and investment balances decreased by approximately $7.7 million to $17.3 million. The reduction reflects outflows for the Agility acquisition of $4.1 million, capital expenditures of $1.2 million and about $1.5 million for funding working capital.

Approximately 15% of the balances were held in the US and the rest were held overseas. We continue to sustain our US cash balances by deferring cash transfers to our operating subsidiaries. In the third quarter this deferral on a proportionate basis resulted in a $900,000 dividend income for US tax purposes.

Our capital expenditures this quarter were $1.2 million compared to $700,000 in the previous quarter. In the fourth quarter we expect CapEx to be in the range of $500,000 to $600,000.

I will now turn to our foreign exchange hedging program and other items. At the end of the third quarter, we had approximately $17.7 million in outstanding forward contracts to hedge our overseas exposure for both expenses and revenues. In Q3 the US dollar moved in a narrow range against the major currencies that we are exposed to and based on mark-to-market our forward contracts had a notional gain of $100,000.

Let me now review our revenue guidance with the fourth quarter. We expect revenues to be in the range of $14.7 million to $15.8 million. The expected segment breakdown is Digital Data Solutions in the range of $11.3 million to $12 million, IADS between $1 million and $1.2 million and Media Intelligence between $2.4 million and $2.6 million.

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

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

As O'Neil just mentioned in the third quarter we had approximately $1.6 million of one-time costs, most of which related to our third-quarter acquisition of Agility from PR Newswire and a payment we agreed to make under the earnout we put in place when we acquired MediaMiser in 2014. I will start by discussing our Media Intelligence business, what these costs were for, where we are with the business and what we hope to accomplish and then I will cover our other two operating segments in turn.

We closed our acquisition of the Agility business from PR Newswire on July 14. Agility is a SaaS-based tool used by PR and corporate communications professionals for identifying journalists and bloggers who might have an interest in a particular story and then distributing the story to those identified journalists and bloggers.

Now Agility Plus is a tool that PR and corporate communications personnel use to monitor and measure media coverage of stories. We paid $4.1 million for the business in a sale that was forced by market regulators and US and the UK in conjunction with the acquisition of PR Newswire by Cision.

Agility produced approximately $5 million in revenue last year. This quarter it produced $1.8 million which suggests an annual growth rate in the mid-20% range. It also contributed $350,000 of EBITDA to the quarter after excluding one-time costs incurred for restructuring and integration.

There are several reasons why we like this acquisition. First, it's almost all recurring revenue. As a result, in this quarter 80% of our total Company revenues were recurring. As you know, driving recurring revenue has been a strategic priority for us.

Second, it fits well with our MediaMiser business from an operating at go-to-market perspective. We are able to leverage various MediaMiser assets and operations including MediaMiser's back-end big data engine that will soon run Agility in addition to MediaMiser as well as the offshore operations that we have put in place for MediaMiser.

Third, from a go-to-market perspective MediaMiser and Agility are a great fit. MediaMiser is a high-end managed service solution best suited to large companies and government entities. There are a lot of functions and features that we've built into the MediaMiser enterprise tool that we are going to build into Agility, making Agility better than it's ever been before. In addition, we are going to offer MediaMiser managed services to our new Agility customers, bringing them still greater value.

Fourth, Agility is regarded as one of the four leading global media contact databases which makes it a fairly unique asset. Lastly, there is a large addressable market for media contact management and media monitoring.

Last year MediaMiser competed favorably to win business from government agencies like Canada Post and companies like General Electric and McDonald's. Now with Agility we think we will be even stronger. We intend to rebrand the combined business later this year under the banner of Agility PR Solutions.

45 former PR Newswire employees came over with the Agility business and six more will be joining us this month. We've spent the better part of the quarter standing up the Agility business and beginning the process of integrating it. This included an August strategic off-site to bring together the two management teams, define our go-forward strategy and establish our objectives as well as a September sales team off-site to integrate sales processes around our combined market offerings.

We terminated approximately 10 staff as part of a restructuring of certain operations. We also made several appointments during the quarter.

We appointed Martin Lyster as CEO of the combined business. Martin was formerly the COO of MediaMiser.

We also appointed Allison Murphy as a managing director for our UK operations and Michele Putman as Vice President from North American markets. Both Allison and Michele came over with the Agility acquisition having been with Agility from its very beginning and have extensive industry experience.

In terms of one-time costs we incurred $360,000 of professional fees and restructuring costs in connection with the Agility acquisition and integration and a charge of $1 million representing negotiated final payment under the earnout provision that we had in place in conjunction with the MediaMiser acquisition which otherwise would have run through March of next year. We believe that the amount we agreed to pay on this is fair and enables us to integrate the MediaMiser and Agility businesses without having to structure around this earnout.

Among the our several priorities over the next quarters will be to delight the Agility customer base by bringing them some great capabilities and putting in place a marketing and sales function that substitutes for PRN's common sales channel. In future calls we will be sharing a set of metrics that enables you to track the results of our efforts.

Shifting now to our Synodex business within our IADS or Innodata Advanced Data Solutions segment, I will start with the good news from the quarter. In our last call I talked about a new potentially significant client we had signed. The client, who is one of the top 10 life insurers, started with two of its eight life underwriting teams.

Based on success to date it has notified us that it will be expanding to all eight life underwriting teams. In a recent email to us the client referring to our service said, and I quote here, this is game changing for us. The client went on to say how as a result of using our service they were able to increase their throughput significantly, enabling them to be nearly 50% above their plan for their largest annual sales contest.

They ended the email by saying, quote, we were glad to have Synodex be a critical part of our success. Just this week the client further expanded use of our services to include its disability underwriting position and has begun discussing the possibility of using us in their long-term care division as well.

Last quarter I spoke about a very large client that we signed late in the fourth quarter. In the beginning of June we started them off on our new Synodex 4.0 product small volumes as we collaborated with them on an almost daily basis to validate the customizations that they required. We completed the customizations they required and they expressed to us that they were very happy with how it came out.

We also set up a failover processing capability in our Philippines production center. Use has been continuing to expand within that organization. The client is now conducting its live testing stage business case evaluation to measure the potential impact of the product within its business.

Last quarter I told you that we were delayed in starting another client due to the client's internal IT staffing issues that were preventing them from completing the internal programming work necessary for our systems to exchange data. This quarter they were able to get the programming done and successfully start the network communications between our system so we are off to a good start.

Last call I mentioned to you that another existing client was considering a significant expansion to our services. I spoke to them just yesterday and their evaluation is continuing but things look good.

As we discussed in our last couple of calls we've been demoing our new product release, which we refer to as 4.0, to both existing clients and new prospective clients. Indeed, the strength of this release has helped us win the clients that we've brought in this year. Beyond that it has gotten our existing clients excited about more fully being able to use the XML data with complex rules, which is at the heart of our value proposition.

It is also been received well by the many potential clients we continue to court. For example, we signed a contract this quarter with a major reinsurance company with which we will be doing testing in Q4 and building a rules base. For this client the data-driven nature of our offering is key. Their plan is to be in a position to make a go-forward decision by January 1.

Unfortunately, however, several of the clients we hope to close in late Q3 or Q4 have pushed things out to 2017. There is still a few we think could be potential Q4 closes, however, and we are actively working to move things forward with all of them as expeditiously as possible.

IADS revenue in the quarter was down slightly by about $130,000 based on some one-time systems development revenue we had last quarter for docGenix clients. We expect next-quarter IADS revenue to be up with gains in both docGenix and Synodex.

I will now turn to our Digital Data Solutions segment. Revenue in the segment was $12.1 million which was $1.2 million lower than last quarter. The revenue decreases we've seen over the past quarters have been principally the result of progressively lower volume from a key e-book client. The drop this quarter was higher than we had expected as a result of the client pulling back from its Chinese language program.

In this quarter we also absorbed a price concession with a major customer. Both of these will impact our Q4 outlook. In addition, one of our venture-funded customers who contributed $650,000 to revenue in Q3 has requested that we defer half of its billings to Q1 as it closes another round of financing.

On the positive side we succeeded at winning an opportunity with a new customer, a financial services customer that has the potential to approach $1 million. This win is pursuant to the strategy we discussed in our calls this year to go beyond publishers, information companies and e-book retailers targeting data-driven enterprises. This strategy, in fact, inspired us to change in the name of the segment from Content Services to Digital Data Solutions.

We have expanded our Innodata Labs R&D efforts to support both our information Company clients and our enterprise clients and the group is engaged in some compelling new technology development and customer pursuits. Indeed, it was their development that enables us to win this new financial services customer that I just referred to.

Looking at the Company overall this quarter our EBITDA was adversely affected by $350,000 of gestational costs in our European end-to-end publishing operations, down from $400,000 last quarter, and $350,000 of EBITDA losses from our combined new businesses, down from $800,000 of loss last quarter. One of our stated goals this year is to shrink these EBITDA losses over the course of the year and bring them to breakeven. I wanted to be further along than I am in terms of a accomplishing this. Still we're trying to make intelligent choices that mitigate investment risk but preserve opportunity.

In terms of achieving our goal we've got several cost reduction plans underway as well as some hoped-for revenue uplift. But we are also experiencing headwinds including euro depreciation and Synodex prospects that have pushed out to Q1. We will be updating your next quarter as to where we were able to get to by the end of the year and what level of investment in these programs we'll need to carry into next year.

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

(Operator Instructions) Tim Clarkson, Van Clemens.

Hi Jack and O'Neil. I just want to go through some of the pieces of the business here.

So on the European piece I know that at the beginning of the year that we were expecting to try to get additional $1 million to $2 million from these European players that were basically shifting some of their in-house business to Innodata. What's the status in terms of how much revenue are we getting from those new sources of revenue?

I don't know that we have that exact number for you right now because the new business is part of this client's overall business. I think maybe we will have to share that with you at another time. I think the important thing, though, is that we are continuing to ramp up on that.

A lot of losses that we are incurring there are we call them gestational losses because it's basically hiring the staff that we need to do the work and training them in advance of the work coming in. Then ask the work comes in and we take over this operations there's a learning curve. So people are less efficient at first, but then they gain efficiency.

And as they gain that efficiency we end up making greater revenue per person because our revenue is typically denominated in a unit-based way, not in a per person recovery rate way. So that's why we hold those costs. It's in anticipation of that revenue and the revenue is going to be continuing to come in.

Are we still looking at potentially $1.5 million to $2 million a quarter from these deals or what's the potential revenue on these deals?

That's in the range of the potential. The euro depreciation has taken a little bit off of the top when you convert that back to dollars.

But at the same time we are seeing other opportunities within that client. They want to be aggressive. They want to accomplish a lot in terms of cost savings and we are continuing to work with them to look at other things?

Okay. And going to the insurance piece, so right now we are somewhere between $1 million and $1.2 million on the whole IADS status. What's the reason?

I mean is there a goal of getting this to $1.5 million to $2 million in a reasonable period of time? Or what's a reasonable expectation in terms of growing that division?

You know, we continue to see big opportunity. I'm sitting here with our pipeline actually open right in front of me and I mean there's close to $30 million of addressable stuff right within our pipeline. I think the frustration that we continue to have is things move very, very slowly within these organizations.

A quarter to them goes by like a week goes by to me. And that's just something that we've learned to have to contend with. But the good thing there is that we've got a proven business.

I read you the remark that one of our customers shared with us this quarter which is glowing. And that's one of the top 10 insurance companies out there.

Beyond that we've got a data-driven solution that supports automation and if you look at any of the big conferences life insurers and insurers generally are having they are all talking about the importance of data, and data digital transformation within their businesses. So right place, right time, I think the headwinds or the bureaucracy it the incremental approach to change.

And even beyond that it's that -- and now we're getting a better view of this, this year especially they've prioritized in terms of that digital transformation, developing some of their front-end web-based systems so that people can order life insurance online. A bunch of these guys didn't have that in place believe it or not.

And then they are saying, and this is what's happening in the ones that got pushed over to 2017, they are saying now that we've got that in place our IT people can work with you on the operations side and the big data side to do the things necessary to utilize your service. So I hope that answers the question, Tim.

Sure. One other piece on, you mentioned that you have a potential in the disability end. Is that something that you can start working on right away or do you have to do a lot of development work on that?

Well, we had to do some development work but that's already done. So we are now working with two clients within their disability divisions, as well. That's new for us. And then we've got two other clients who are looking to take us into their long-term-care underwriting division which is yet another opportunity within that general insurance space.

Okay. Moving into the MediaMiser, I guess what's the new term for this division?

Well, we call it the Media Intelligence --

Media Intelligence Solutions. So based on what I'm hearing is a 20% growth rate, is that the goal of this division in terms of revenue growth?

Yes, you know we are going to be sharing some metrics and growth expectations with you in our next call. But we think that there's a large, addressable opportunity out there. One of the fun things about it is I think we are probably one of the companies out there who has the best customer service, the best client retention rates and maybe even some of the best technology.

But we are small. Small fish, big pond, and the big pond adds up to close to $1 billion of addressable revenue. So we plan to have some fun with it and we think we're going to be positioned well in order to grow that.

There's some work to be done for sure. We are going to have to put in place the mechanisms that effectively substitute for PRN's sales channel. We get that, but we've got some good plans and ideas there, as well.

Okay. Well, I'm done. Thanks.

Joe Furst, Furst Associates.

Good morning, gentlemen. In your basic business, which is still the biggest part of revenue, what are you doing to try to grow that business because that's key?

Yes, it is key, so we are doing a few things. One of the things that we are doing is we are setting our sights increasingly not just on information companies and publishers and e-book retailers, but we are looking to the enterprise. There are all sorts of companies that are trying to figure out their big data plays, their digital transformation plays and we think that there's opportunity within that for us.

So we talked or we are talking this quarter about a significant new client that we brought in who is not a publisher or an information company or an e-book retailer. They are a financial services institution. But they are doing things with data and they are doing things with data that we can help them do.

So a lot of what we are going to be doing is focusing on that. We are going to be continuing to innovate on the technology side. In fact, the innovation that we've done with our Innodata Labs group was what enabled us to win this new client.

We see other things forming up that they can be helpful with, as well. And in Innodata Labs what we are really focusing on is applying artificial intelligence to problems of information processing and publishing and obtaining value from digital data. So we think there is good opportunity there.

And with your business in Great Britain with this Brexit vote, is that anything negative as far as your business is concerned?

We are not seeing anything right now. Of course, currency is always an issue for us and in Agility we've got a piece of the business that is in the UK and is exposed to foreign currency fluctuations. But that's something that we will continue to watch and manage.

All right, thank you.

Ed Fowler.

Good morning Jack and O'Neil how are you today? Yes, I don't have much to ask here, but what do you anticipate the revenue to be from the European publisher in the fourth quarter?

So what we are doing is we are baking that into our overall guidance that we are giving. And within the range that we are giving we are not prepared to provide guidance on a client-by-client basis.

Well, I have in my notes it was something like $4.9 million.

I think that, again, for a bunch of reasons including competitive reasons and confidentiality reasons we don't go down to the client-specific level and provide guidance.

Okay. Are you done with the improper payments or are there any further charges?

So where we are there is we are essentially we hope closing the investigation. We're hopeful that there isn't going to be more where that came from, but we will continue to provide updates.

Okay, thank you, Jack.

(Operator Instructions) I am showing we have no further questions at this time. I'd like to turn the call back to our speakers for closing remarks today.

Thank you, operator. So we are off to a solid start with Agility in terms of integration.

We are pleased that in two years time we've gone from a business with zero subscription revenue to now having more than $10 million of annualized subscription revenue. It's a big change for the better to our business model.

In our Synodex business we came out of the gate strong with a new important client. They've expressed their delight with what we've enabled them to achieve that has helped, in fact, drive revenue. They have expanded our footprint within their underwriting division. Just this week they started bringing us into their disability underwriting division.

We are continuing to nurture our customer prospects and push forward although it's a slower slog then we'd want it to be. We expect, though, that revenue will go up next quarter.

In our Digital Data Solutions segment we are continuing to face headwinds from a key e-book customer dialing back on its requirements. But we are continuing to innovate the core business to align it with the needs of broader markets who see the benefit of digital data within their businesses. Our win this quarter with a potentially million-dollar contract with a financial services firm is encouraging.

So thank you everyone for joining us on today's call. We look forward to sharing with you more as we progress. Thank you.

Today's conference is available for replay from 2 p.m. Eastern today to December 1, 2016 at 2 p.m. Eastern. You may access the recording by dialing 866-375-1919 or 719-457-0820 using passcode 6808319. Again, the numbers are 866-375-1919 or 719-457-0820 passcode 6808319.

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