Innodata Inc (INOD) 2017 Q1 法說會逐字稿

Good morning, and welcome to the Innodata First Quarter 2017 Earnings Call. Please note that today's conference is being recorded.

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

Thank you, Amelia. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata and O'Neil Nalavadi, our CFO. We'll hear from O'Neil first, who will provide a detailed review of our results for the first quarter, and then Jack will follow with additional perspective about the business. We'll then take your questions.

First, let me qualify the forward-looking statements that are made during the call. These statements are based 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 with our Digital Data Solutions clients and the ability of these clients to reduce, delay or cancel projects; continuing DDS segment revenue concentration in a limited number of clients; inability to replace projects that are completed, canceled or reduced; our dependency on content providers and our media intelligence solutions segment, 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 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 first quarter 2017.

Total revenues this quarter were $15 million compared to $15.7 million last quarter. And total adjusted EBITDA was a loss of $160,000 this quarter compared to a profit of $550,000 last quarter, which is a reduction of approximately $700,000. These EBITDA figures exclude acquisition-related amortization charges for both quarters and onetime charges in the prior quarter. At the current level of $15 million in quarterly revenues, our operating leverage is quite high, so one can expect that a sizable portion of any revenue growth or decline will translate into an equivalent EBITDA change.

I will now review the key line items combined with segmental performances on a sequential quarter-over-quarter basis. There were no onetime charges this quarter. However, we had onetime charges in the prior quarter, so my remarks on comparative results will exclude the effect of onetime special charges from the prior quarter.

On a segment basis, Digital Data Solutions revenues were $11.4 million this quarter compared to $11.7 million last quarter. Revenues trended lower because of reduced volumes from several clients, after offsetting higher volume from one enterprise client that we referred to in the fourth quarter. IADS revenues were $1 million compared to $1.25 million last quarter. This decline was in our Synodex business, which reported a top line of $720,000 compared to $1 million last quarter.

We experienced a decline in Synodex revenues because of lower seasonal volumes from various clients, combined with an expiration of a contract last quarter. In our Media Intelligence business, revenues were $2.6 million compared to $2.7 million last quarter. The decline was primarily due to a lowered number of customer renewal rate, which was factored into the guidance we have provided for Q1. We have now gone through 3 quarters of renewals since the Agility acquisition. And our renewal rate across all Agility customers was approximately 74% for last 3 quarters, which is below our longer-term targeted renewal rate of approximately 80%. And initial lower renewal rate was built into our forecast. As we thought it would be prudent to do so, following our acquisition of the Agility business without the full account management team from PR Newswire.

Our customer account teams are progressively getting closer to all the acquired customers, with enhanced support services and as our customers' experiences improve, we are hoping that the renewal rates will increase. After factoring the first quarter renewals and considering 54 new customers that we acquired during the first quarter, we had a total of approximately 1,350 direct customers at the end of March compared to 1,450 customers at the end of December.

In addition, at the end of the first quarter, our channel partners, who purchased our global media database through an API had approximately 400 customers.

Consolidated gross margins, excluding acquisition-related amortization expenses were $3.5 million this quarter or 23% of revenues compared to $4.3 million or 27% of revenues in the prior quarter. At the segment level, the gross margins in our digital data solutions business was $2.15 million or 19% of revenues compared to $2.6 million or 22% of revenues in the prior quarter. In both quarters, we incurred production expenses of approximately $350,000, which is 3% of revenues in respect of a venture-funded client that is in the midst of a financing transaction.

As discussed in the previous earnings call, our ability to recognize revenues from this client is contingent upon the completion of their transaction and getting paid for our services.

Moving over to IADS. We had a loss at the gross margin level of $100,000 compared to gross margins of $70,000 last quarter. This was attributable to lower Synodex revenues. In our Media Intelligence business, gross margins, excluding acquisition-related amortization expenses were $1.4 million or 55% of revenues compared to $1.6 million or 58% of revenues last quarter. I will now drill down to SG&A expenses.

This quarter, our SG&A expenses were $4.6 million and last quarter, they were $4.9 million, excluding onetime costs of $150,000. The decrease was primarily in our DDS business, as there were no typical fourth quarter-type seasonal expenses this quarter, and we had a miscellaneous income of $200,000, which offset expenses.

Excluding the onetime costs that I referred to, SG&A expenses in Digital Data Solutions were $3 million this quarter compared to $3.25 million last quarter. In IADS, expenses increased by $70,000 to $320,000 this quarter. This increase was in our Synodex business and was driven by travel, operating leases and other items. In Media Intelligence, our expenses were lower at $1.35 million compared to $1.4 million last quarter.

Moving down to pretax earnings. Our pretax losses, excluding onetime costs were $1.15 million this quarter compared to $670,000 in the previous quarter. The $500,000 increase in pretax losses was attributable to lower gross margins of $800,000, offset by lower SG&A expenses of $300,000. Our adjusted EBITDA was a loss of $160,000 this quarter. Last quarter, excluding onetime charges, our adjusted EBITDA was $500,000. In the current quarter, adjusted EBITDA was $70,000 in Digital Data Solutions, $180,000 in Media Intelligence and a loss of $400,000 in IADS. This IADS loss was the net result of a loss in Synodex of $500,000, partially offset by a profit of $100,000 in docGenix.

Moving over to net earnings. Income tax on profits earned by offshore subsidiaries was $400,000 this quarter. Last quarter, our net tax expense was 0, as a $400,000 tax accrual was offset by a reversal of an $400,000 accrual in respect of a prior year.

This accrual was reversed because we got a favorable verdict in a disputed tax case. After deducting tax expenses and minority interests, our net loss was $1.5 million this quarter compared to $600,000 in the previous quarter. Our cash and investment balances were consistent at $14.2 million in both the quarters. Approximately 15% of the balances were held in the U.S. and the rest were held overseas. We continue to fund our U.S. cash needs from our overseas balances, and in the first quarter, this resulted in a $1.5 million deemed dividend income for U.S. tax purposes. Our capital expenditures this quarter were $1 million compared to $850,000 in the previous quarter.

In the second quarter, we expect CapEx to be in the range of $750,000 to $900,000. I will now turn to foreign exchange hedging program and other items. At the end of the first quarter, we had approximately $15 million in outstanding forward contracts to hedge our exposure for both foreign currency expenses and revenues. Based on mark-to-market, our forward contracts had notional losses of $10,000 at the end of the first quarter. Let me now review our revenue guidance for the second quarter.

We expect revenues to be in the range of $13.4 million to $15.3 million. The segmental breakdown is Digital Data Solutions in the range of $10 million to $11.5 million, IADS between $1 million to $1.2 million, and Media Intelligence between $2.4 million to $2.6 million. The lower end of our revenue guidance does not include approximately $1.4 million of contingent revenues in DDS. This is from the venture-funded firm that I referred to earlier, has any revenues are dependent on payments being received by us. In Synodex, we're expecting that the second quarter revenues would increase by approximately $100,000 to $800,000.

Our forecast indicates that our breakeven quarterly revenues for Synodex is approximately $1.2 million before considering any additional cost changes and productivity improvement. Thank you.

And now, I'll pass the call over to Jack.

Thank you, O'Neil. Good morning, everyone. Thank you for joining us today. Today, I'm going to discuss our overall business strategy for 2017, together with the supporting strategies we have adopted within each of our segments. First, a quick bit of context.

Our emphasis over the last few years has been to shift from onetime project-based revenue to revenue from products or services for which customers have an ongoing need. We refer to these revenues as recurring revenue. When we're providing a recurring revenue-producing service or product, become part of our customers' operational value chain. Approximately 80% of our revenue is now recurring in nature. The challenge we presently face is one of volume, our revenue level is too low for our fixed costs. Therefore, our strategy in 2017 is to focus on 3 things: One, managing costs aggressively; two, driving growth in our new recurring revenue businesses; and three, launching new recurring revenue service offerings aimed at our existing markets and new markets. I'll drill down a bit on each of these. Starting with the first, costs management.

In terms of costs management, our current adjusted EBITDA breakeven is approximately $15.2 million of quarterly revenue. We are examining ways to reduce further our cash breakeven, with a target of lowering our operating costs by $2 million on an annual basis across the businesses. This will include a range of initiatives from implementing improved technology, to process innovation, to reducing third-party costs such as content acquisition. Our second strategic prong is to drive growth in our new businesses, by which I'm referring mainly to our Agility and Synodex businesses. Our Agility and Synodex products are increasingly known and well regarded in the marketplace. In both of these businesses, we will be pushing hard in both customer acquisition and account expansion. What's both exciting and compelling, is that in both of these businesses at the point we're now at, $1 of incremental revenue growth could yield in excess of $0.50 directly to the bottom line. So let's now dive deep into each business, starting with Synodex.

In Synodex, we're anticipating to announce this quarter, signing a fairly significant expansion of a program with an existing client. Once we are ramped up on this new engagement, which should happen by late this quarter or early next, we should then have approximately $4.2 million in annualized contract value in backlog. And after we complete implementing over the next few months certain plant cost savings and productivity improvement initiatives that are currently underway, our Q1 annualized cost base of $4.8 million should be reduced to $4 million. In 2017, we will continue to progress our 2017 pipeline, which we currently estimate as having a potential value of $13 million in annual contract value. Our main headwinds, our mergers and management changes within client prospect organizations, budget allocations and competing digital transformation initiatives that certain client prospects prioritized for 2016, but have not yet been completed and are consuming their available IT resources.

In terms of the Agility business, we're feeling encouraged, both with our new channel partnerships, including the Business Wire partnership that we announced in late 2016 as well as our new marketing initiatives.

For 2017, we have a go-to-market plan that calls for increasing renewal rates with our existing customers, capturing market share directly via sales and marketing activities in the U.S. and the U.K., cultivating indirect channels in core markets to expand customer base, growing our database revenue via indirect channels outside our core markets and further penetrating our existing customer base with additional products and services. Thanks to our mix of platform, products and services, our overall customer retention is strong, which provides the requisite lift for growing this recurring revenue business.

Coming back to our overall 2017 strategy, as I mentioned a few minutes ago. We plan to further expand our services portfolio to drive recurring revenue in existing and new markets. We're looking to do this mainly through organic activities within our Digital Data Solutions or DDS business. We have plans to launch at least 4 new product-type services during 2017 in DDS. In the first quarter, we launched 2 new such services. One involves performing certain management functions for companies that have complex requirements for managing intellectual property rights and royalties. In the first quarter, we launched the service with our first client, a well-known nonprofit organization. The engagement is going exceedingly well so far, with a value of approximately $300,000 per year. For this client, we are focusing on managing licensing rights for its digital assets, including videos and photographs.

The second business that we launched in the quarter involves, providing English language knowledge services for Asian growth companies. We launched this service with a client whose engagement we expect will be valued at approximately $300,000 in its initial phase. Beyond this, we have 2 other new services in the works that we think will drive high-quality recurring revenue in new markets. In each of these, we're working with alliance partners, one of whom is an existing customer, and we're experimenting with value-based pricing mechanisms that provide risk-reward opportunities for us. In one of these new offerings, we're applying cutting-edge machine learning and deep neural networks technology to textual data. We're early innovators in this regard, having started 3 years ago, putting these technologies to work, both to increase the efficiency of data transformation and to enable insights to be mined within large repositories of digital data.

Historically, most of our new bookings in DDS have been from existing clients and much of our new DDS bookings have been onetime projects. The DDS management team will be duly focused on existing customers, and towards that end, we now have in place a team of client partners, who are responsible for aligning to our customer-strategic objectives, but in addition to this, we now have in place a marketing and sales team, that will be working to bring our new offerings to the market and all of the new offerings we roll out this year will be repeatable solutions that we can offer to broader markets to help drive recurring revenue growth.

I'll now open the line for questions after which, I'll wrap up with some final comments.

Operator, we're now ready for questions.

(Operator Instructions) And we'll go first to Tim Clarkson from Van Clemens.

Just wanted to focus a little bit initially on the IADS, on the insurance piece. So it sounds like, you've got a contract that will -- pretty significant contract that should close within a couple of months here. And it sounds like that would -- assuming it closes that would give enough revenue to get that division to breakeven profitability.

That's right, Tim. So with that in combination with some cost-reduction initiatives that we have implemented and are now implementing, we think within next several months, we will be at or beyond breakeven in that business. And then the good thing is, behind that, we've got, as I mentioned in my remarks about $13 million in pipeline, in 2017 pipeline, and in excess of $0.50 on $1 of new bookings should come right to the bottom line. So we're pretty excited about that. Very focused on both the cost savings and the business closings that we have to do in order to make that a success.

Okay. You mentioned before that the customers that you have in the life insurance business that have engaged this service there by and large, stuck with you. Have you lost any key customers in that area?

So we haven't lost any customers. We have one customer whose contract came to an expiry date by the end of the year. We're working on renewing that. Our understanding is that they have some moratorium in place, on new contract signings and engaging. So we're trying to work through it. But it wasn't because they weren't satisfied with our product. The customers that we've been engaging with are very satisfied. They've been having good results. And to that point, the contract that we're hoping to sign and get off the ground in the next several weeks is with an existing client, who is expanding services with us.

How many total customers do you have in the life insurance end, right now?

I have to give you -- I don't have that count with me right now, but we've got about 8 or 10 clients, right now.

Okay. Okay. On the other end, you mentioned in the last conference call that you're excited about a new project that you thought was large and important from a technology point of view with this machine readable, data mining. How's that project going on? Can you give us any idea how significant revenues that project is?

Sure. So the project brought us, I believe, that was about $1 million of revenue in this quarter. And that's the beginning of the project. It continues. We're doing very, very good work there. What is tremendously gratifying is that that's a project not with a publisher or an information company, but an end user of digital data. Very large end user of digital data. And they're very pleased with the work that we've been doing, very complex work. But work that we believe will meet their needs. They're building an internal product, if you will. That will have to go through a number of gated processes and approvals, but we're very encouraged that it will be successful, and we will continue to be successful with it.

How long do you think that project will go on?

It's hard to say. They're building in phases. I'd like to hope that it goes through, at least through 3 quarters of this year. But as I said there are internal gated processes that they need to meet, goals that they need to meet. And if they do, then it could potentially go longer than that as well. We are talking to them about other related work that we can be helping them with.

So specifically, what's the chances of getting the legacy division, I always call it, as the DDS, you call it now?

DDS.

Yes, DDS. I'm balanced with ordinary names and complicated names, I'm worse with. But anyhow, that's running in what $11 million range, I mean, what's the probability of getting that division back up to $13 million, $14 million, $15 million. I mean, is that an expectation you have third, fourth quarter? Or is that too ambitious?

Directionally, we're certainly working toward that. And we see a couple of things go in that business. One thing is, as I've said before, historically, most of our bookings have been project-based bookings, even though we have the strong recurring revenue base. The new bookings have been project-based bookings with existing customers. And we think we need to break out of that for a couple of reasons. One is that, there's not a lot of growth and not a lot of new products being launched in those market segments right now. So we need to break out of that mold, by looking at new markets, by looking at new products and services that we can bring to new markets that enable us to drive recurring revenue. We had some good success this quarter. We launched 2 new, such new products. One geared to Asian companies, who are looking to break into U.S. and English-speaking markets and require certain knowledge services from us. The other one in terms of helping companies that have extensive and complex operations regarding rights management and IP management to apply some technology and processes to do a better job with that. We launched those both, not speculatively, but with a client in hand. Both of those are going very, very well right now. And we intend to throw salespeople at that and ramp that up. Beyond that, we've got, as I also mentioned, at least 2 other new service -- new products offerings that we're going to bring to the market this year. So we're, I think doing the right things. We're reacting to the fact that our existing historical legacy markets are little bit soft right now. To the fact that we need to drive recurring revenue as we have been and will continue to with Agility and Synodex by doing more things, and we intend to persevere very, very hard on those things and be successful.

One last question. How hard is it going to be -- you're talking about basically, lowering your breakeven by a couple of million. Is it a couple of millions per quarter?

No. We're looking at a couple of million annualized value.

Okay. Okay. So it'd be $0.5 million per quarter?

That's right.

Right. Okay. And how hard -- is that a doable task?

Well, it's our target. Nothing's easy. But I think it's achievable.

(Operator Instructions) And we'll go next to Chris Beach from Hawksbill Holdings.

I was hoping, O'Neil that maybe you could run through the segment level operating income that we'll be seeing in the queue, if that's possible?

Chris, the guidance that we provided is a total range of -- the total revenues of between $13.4 million to $15.3 million.

No, I'm sorry. For the first quarter, I just like to know...

For the first quarter.

Yes. What was the segment level operating income in each of the segments as you define it in the Q?

Okay. The revenues for Digital Data Solutions was $11.3 million -- $11.35 million and the pretax income was about $800,000 loss. And the adjusted EBITDA was approximately $70,000. In media intelligence, the revenues was $2.6 million and pretax losses was $150,000 and adjusted EBITDA was approximately $180,000. And in IADS, the top line was approximately $1 million. Pretax losses were $400,000, and adjusted EBITDA was an equivalent of $400,000 loss.

Okay. And Jack, as it relates to this large contract that's pending within Synodex. I'm not sure, I fully appreciated what it was that you said. I'm just hoping that you can give us a little more clarity on what really is happening? Or about to happen? Or has happened in terms of actually signing a customer? Is the contract in fact signed? Is the ACV in backlog currently? And do you have a defined calendar for that ACV to ramp? Or is it something where we'll be talking about the ACV ramping another year from now?

Sure. The contract is currently signed, but there was some -- we hadn't announced it, because there were some issues with exactly what the customer wanted done and whether we could do a proof-of-concept that would in fact prove that it was capable of being achieved. So we have succeeded that proof-of-concept over the last several weeks. Customer is very happy, and have told us that they now want to ramp up. The value of that would be about $800,000 of ACV. And when you add that to the existing backlog that would bring us to an annualized backlog of $4.2 million. In terms of ramp up, we've started the ramp up, and we think that, that will go through end of June.

Okay. So it's not $4.2 million a quarter. Its $800,000 per year or $200,000 per quarter, is that right?

Yes. So when I talk about annualized contract value, annualized refers to annual, per year.

Okay. Got it. So we're talking about, if revenue in the quarter in IADS was roughly $750,000. With this incremental contract, you're talking about only getting back to $1 million per quarter in revenue?

Yes, so the quarter that we just came off of was a little bit light. We think that based on bookings a normal quarter would be about $860,000 right now. This engagement would add another $200,000 to that, so again, a normalized quarter would be about $1 million, a little bit higher than that. And our cost after costs takeout would be $1 million or slightly under $1 million, measured quarterly.

Right. And then when you talked about the $13 million of sort of pipeline that you have out there, that $13 million in multi-year ACV, right? That's not $13 million in annual ACV?

No. That is $13 million in annual ACV.

So meaning that if you signed all of your contracts that are in the pipeline today, IADS will be generating $13 million in annual revenues plus another $1 million that's already in the bag?

No. If we signed all of those contracts, IADS would be generating the $4 million that's already in the bag plus the $13 million, so would be generating $17 million per year.

Okay. I'm sorry, I hate to hang up on this question, but it is very important to understand exactly what you're saying. You just told me that the $4 million was $800,000 of annual revenue?

No, no, no. Let...

Meaning that that's 5 years' worth of $800,000 worth of revenue. Am I missing something?

No. It's not, Chris. Let me try again. I'm sure it was my miscommunication. After this new $800,000 contract and when I say $800,000 that's annual revenue. So if we were to sign that as a 3-year deal or a 5-year deal, the value of the deal will be much more than that. We're talking about annual revenue. After we sign that, our book of annual business is $4 million. So in a year, we would expect Synodex will do $4 million.

Okay. Right. I'm sorry. You were right. I was confused. All right. So the $1 million a quarter is what you would get to $4 million a year. I got it. Okay. I'm...

That's right. And if we signed, in addition to that, all of the $13 million of pipeline. And again, I guess, I want to emphasize that chances of that happening are very, very, very slim. But if we were because that was your question -- if we were to then that would add $13 million per year of revenue. $13 million plus $4 million would be $17 million.

And is there anything about the $13 million today that's any difference than the ACV numbers that you've disclosed in the past. Because I mean, this is the first time, we heard about ACV, I think in probably 3, 4, 5, 6 quarters. And just curious why it's relevant now when it wasn't relevant previously?

Look, it's relevant always to us. It's the measurements that we use to assess the viability of the business, the progress we're making in the business. Publicly, we look to disclose information when we think that it's valuable to investors and doesn't create additional confusion. In the recent past, we've had some issues with bookings that we considered to be bookings that turned out not to quite be bookings. And when we learned of that, we realized there was some -- we need to have a little bit more solid history in place, before we use those as public-facing metrics. And they're the best metrics out there to measure the business, but they're not always completely reliable.

Right. So therein lies the genesis of the question, which is, it sounds like you now think that maybe the $13 million is a more reliable figure than maybe it was in the past, meaning that maybe you have a higher possibility of turning that into actual revenue? Or is that not the case?

Well, I think that there is -- within that $13 million, there is very solid near-term opportunity. Some of the best opportunity I've seen in that business or in any of our businesses frankly. But there are frustrations, and I mentioned some of those. And I want to be really clear with folks. One of the things that we're seeing going on a lot in the industry right now is management change. So when you combine frequent management change with a long sales cycle, that's not a good thing. Until a couple of weeks ago, that $13 million of 2017 pipeline was $15 million. What happened? There was a management change. New person comes in to replace our product champion. The person who wanted very desperately to bring our products into his business. New person came in and the new person doesn't know us. And the new person is willing to have a conversation with us, but it kind of restarts a process. So I pulled that $2 million out of this pipeline. I put it into our 2018 speculative pipeline. Actually, I'm not even considering a pipeline right now. So we're trying to use an appropriately high standard to describe what is and what is not pipeline. We're trying to filter that. But the business is an extremely dynamic one. The management changes can be very frustrating, but we need to contend with them and persevere through them.

Okay. Got it. And last question, as it relates to DDS, I don't know it was -- we're coming up on a year now, where you had hired a new business development person for that segment. And I'm wondering, to what extent everything that you've talked about was kind of contemplated as a part of that hire? Or if these are new developments? And has that -- it doesn't seem at least at this point that, that hire has paid off?

Well, the things that we're working on and the things that I've described to you are consistent with the strategy that we've had in that business and that I've been talking about over the last several quarters, needing to drive recurring revenue, needing to productize services, needing to expand to new markets, needing to take advantage of the fact that increasingly enterprises and to consumers of data are doing things to improve their operations using digital data and then to improve the level of insight they have into their businesses. And that we, as a company, need to make that turn. We need to cover those new markets that are emerging. The large contract that was responsible for $1 million this quarter is a result of having responded to that emerging market requirement. The new services that we launched this past quarter were a result of having responded to and having -- identified and then responded to these new requirements. So we're executing on our plans. I wish it were more elegant. I wish it were happening faster and bigger and those things. But I'm confident we're doing the right things, and I'm confident that we're going to see the results from them.

(Operator Instructions) And we'll go next to Steve Kohl from Mangrove.

O'Neil, I just wanted to first say, appreciate the very detailed financial overview. It's like I want to kind of take a step back, Jack, here for a minute in the context of looking at where the stock is. And again, my eyes are going across $50. I think we're at a 14-year low here this morning. And I think that we need to kind of look and some things you're doing, I think are very commendable. But let me add a couple of things. We've got to get the business to a profitable state, where you're sustainable revenue run rate is. So if you guys are running 15 or 13 or 14, it's fine, but make money at that level. So I applaud you for taking off the $2 million incrementally you're proposing, but this has been going on. I'm looking back at financials for 3 years now, and we've been losing money each of these years. And we've actually moved up in the last -- in the fourth quarter, you had a good quarter. But the reality is this can't -- we've got to get to a profitable state, and I really would encourage you to look harder on how to do it. I understand you have to invest and I've got that, but we also have to make money. So that's the first comment. Second comment on Synodex. I want to get your -- for example, one of the great attractions of this business was I thought it was very sticky. And you mentioned in your prepared remarks that you have a client where the contract's expiring after some reason -- there's some hiatus or something they're not putting in the contract. I thought the switching cost was very high and given the sticky, why in the world would they ever cancel it, right? It doesn't make -- what is the alternative, if they're canceling it. So I want to understand a little bit more about that because that's one of the things as you've got these 8 to 10 customers and you lock them in. My understanding was they're not there forever, but they're there for a long time. So I want to understand a little bit more about the dynamics of that? And then I've got a follow-up to the prior caller's question on this ACV background.

So Steve, thanks for the question. So I'll start with your first one. I completely agree with you that the business needs to make money, and we are going to be doing the things necessary, as such in order to ensure that it does. We're going to be looking very aggressively at our cost structure, and we're going to be doing what is necessary in order to make it profitable. I think, if we look back over the last few years, we were investing in some businesses. We're putting some stuff together, but now we've done that. We've gotten there. Now to your point, this is the time that we need to have those businesses standing on their own 2 feet and making money for us. So if we haven't gotten there as quickly, or to the magnitude that we wanted to on revenue alone, the other lever is cost, and we've done a lot already in the Synodex business to lower our operating costs through some improved technology. There are other things and there are more things that we can do and are doing in order to achieve still better operating metrics in that business. Same is in DDS. Same is true across our business. So we do not intend to make excuses for performance. We intend to do the things necessary to have it make money and grow at the same time. In terms of your question about Synodex, you're right. The business was designed and is designed to be a sticky business. It's designed to infuse in operational capability within a company that they would continue to use for a very long time. Some of them will, some of them may not, but this particular client booking that we're referring to was an annualized about $300,000. And what they did was they decided to use our service only in respect of -- or to start using our services owing respect to year-end peaks in volume that they were getting. And they said, well, if that worked out for them then what they would do is look to implement it throughout their business. And if they were to do that, they could be multimillions of dollars for us. They got to the end of year. The contract by its terms terminated, and we've been engaging in discussions to broaden, to either continue the use or to broaden the use. And those have been moving slowly. So those are the gory details around that one.

Yes. I appreciate it. I appreciate the color, Jack. I guess, the question of -- and I know you mentioned what are those, and I appreciate your color by the way on the people changing, that's an important point. But in this case, you've got a potentially huge -- very large customer for Synodex. Why aren't they seeing the value prop -- obviously, you guys try of sell them on the value proposition. Is it an issue they're not seeing it correctly? Have you done trials to expand it beyond those peaks? What is the hitch? Why they are not more aggressive on trying to pursue it with you at this point?

Yes, I think there were several value propositions that we bring to the table. One of which is operational efficiency. So we enabled a team of underwriters basically process to underwrite files at 3x their efficiency. We've proven that time and time again. There are customers who -- for whom that's very appealing. There are customers who say, well, you know what, right now, we don't need to operate 3x as efficient as we are now because our business is dwindling, and we don't want to let go of staff. They will make their own decisions about that, but the fact is we can -- and you could say it 2 ways, we could enable them to operate 3x as efficiently. We can enable them to reduce their costs by aggregate 50%, a very compelling number. Some customers want to action it. Some customers are afraid of that. So that's what we're working on. Now with some of the plans that we're working on now, we're going to even increase that metric beyond that 50% or 3x efficiency. We're working on implementations now, where we fundamentally automate underwriting. Now let's think about that. There will be shops who say that's very attractive to us. We can automate underwriting. In addition to that, we can create large data stores of data that will enable us to better manage our in-force policy base. They love it. There will be others just saying "No, you know, I really like things where they are today." I've been doing this for 30 years. I'm not a big change guy. Let's just keep the way it is. So -- and that's kind of what you get when you go out to the customers. Our job of course, is to figure out who is who, to line up together with people, who are advocates of change and are looking to reinvigorate their businesses to do a great job for them and to help the industry accomplish some very big lifts that they're looking to accomplish. We think we can do it. It's blocking and tackling every step of the way. It's not linear. It's 2 steps forward, one step back. But we think we're making the progress.

Yes, I think that's a good point. I think where people have probably been a little disappointed, Jack, is just getting the traction on some of this, right? I mean, it's an exciting business model. We see the value proposition, I think, as shareholders, as you do it as the management. It's just frustrating obviously, the pace of option and that's understanding what those hurdles are, and when we hear the number, the $13 million and I appreciate and obviously, you mentioned that's the change and $2 million adjustments. But if you get any of the -- even if you get 50% of that or 40% or whatever, that's obviously a big bump. That really puts you in a different level. So that's what we get excited about, as I'm sure you do. And I was just trying to understand the subtleties and whether you feel more confident today with the quality of that backlog than what you did, let's say, 1 year or 1.5 years ago as the business was getting moving. And I take it the answer to that question probably be yes at this over and at this point and I know you did put some caveats on it, few minutes ago. But you said, we shouldn't expect a 13, but do you feel comfortable that 30% of that is real? How would you -- I don't know how you guys look at the funnel probability spectrum, but how would you -- when you multiply all that out, are we looking at 30%, 40%, or 50% as being less than...

What we're trying to do is not to assign percentages to backlog because you can never close half a deal. You either get your deal, or you don't get your deal. It's very binary. So the percentages, if you say, now, we have -- everything is at 30% or chances are you're not closing anything rather than closing 30% of your pipeline. So we try to be -- to hold it up to very, very high standard. Now within that, all deals are not the same. There are deals we're working on that we feel very, very good about near term. And we tend to measure how good we feel about them, based on the level of client commitment and client investment. So we have clients who are actively investing with us, meeting with us. If not, weekly, sometimes even daily. Working groups that have been assembled in order to progress the -- an implementation plan. So those we rank very highly when the customers investing substantially, it's time, and energies and resources, they're doing it for a reason. So within that pipeline, we have several things that are like that. And those are the ones that I feel best about. I'd love to get them closed. If we can get those closed, the effects on the business, given the $0.50 on $1 going to -- were more going to the bottom line, it's huge. In terms of your first point of frustration, I and the Synodex team, we share that frustration. We live it every day. What we try our best to do is to channel it into perseverance. Frustration can be defeating and there's no point of being defeated. We're persevering and...

(Operator Instructions) And with no further questions in the queue, I like to turn it back over to you, Jack, for any additional or closing remarks.

Thank you. So yes, I guess, Q1 was a tough start to the year for us. In DDS, we have lower seasonal volumes from several customer engagements. And we were still unable to recognize revenue from an early-stage client that is working to close financing. In Synodex, we had seasonally lower volumes as well as a contract expiration. All that said, we're very focused on our 2017 strategy, which calls for improving operational efficiency across all of our businesses, driving new growth in Synodex as well as Agility. In Synodex, with a high potential pipeline and in Agility, with a combination of a great product and the marketing team that seems to really be hitting its strides. In addition to that, we'll be rolling out new service offerings in DDS to drive recurring revenue. And as I mentioned, in Q1, we rolled out 2 new service offerings with 2 new customers in new markets, and we have additional new recurring revenue service offerings planned for launch later this year. So thank you for your time this morning. We will be looking forward to sharing with you our progress through 2017.

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