Innodata Inc (INOD) 2017 Q4 法說會逐字稿

Good morning, and welcome to the Innodata Q4 and Fiscal 2017 Results Call. Today's conference is being recorded. And at this time, I'd like to turn the conference over to Amy Agress. Please go ahead, ma'am.

Thank you, Levi. Good morning, everyone. Thank you for joining us today. Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and Raj Jain, our Principal Financial Officer. We'll hear from Raj first, who'll provide a detailed review of our results for both the fourth quarter and the 12 months ended December 31, 2017, 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; the primarily outwill nature of contracts with 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; our dependency on content providers in 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 driving synergies from acquisitions, joint ventures and strategic investments; potential undiscovered liabilities of companies and businesses that we may acquire; potential impairments of the carrying value of goodwill and other acquired intangible assets 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 risk 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.

I will now turn the call over to Raj.

Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial performance for the fourth quarter and fiscal 2017. I'll start with the full year 2017 performance and then review the quarterly performance. Jack will later provide additional perspective on the business.

Our revenues in 2017 were $60.9 million compared to $63.1 million in the prior year. In both years, we incurred the onetime costs and charges that we set out in today's press release. In 2017, these onetime costs and charges amounted to $2.4 million, which were allocated $2.2 million to Digital Data Solutions and $150,000 to Media Intelligence.

In 2016, the onetime costs and charges amounted to $3.2 million, of which, $2.6 million were allocated to Digital Data Solutions and $600,000 were allocated to Media Intelligence.

Excluding the impact of these onetime charges, our adjusted EBITDA was $1.7 million in 2017 compared to $2.8 million in 2016. Our 2017 adjusted EBITDA was comprised of $3.5 million in Digital Data Solutions, offset by EBITDA losses of $600,000 in IADS and $1.2 million in Media Intelligence. Net loss was $1.7 million in both 2017 and 2016.

I'll now review year-over-year performance, excluding the impact of these onetime costs. Digital Data Solutions revenue were $46.8 million in 2017, compared to $50.6 million in 2016. DDS gross margins were 25% in 2017 versus 26% in 2016. And DDS adjusted EBITDA was $3.5 million or 7% in 2017 versus $4.4 million or 9% in 2016. DDS margin declines were primarily the result of revenue declines.

In our IADS segment, revenues increased to $4.8 million in 2017, up from $4.3 million in 2016. The increase was driven by incremental revenues from both existing and new customers. Higher revenues, coupled with production efficiencies, helped reduce the losses of this segment from $1.8 million in 2016 to $600,000 in 2017.

In our Media Intelligence segment, our revenues increased to $9.4 million in 2017 from $8.1 million in 2016. The increase is primarily due to our acquisition of Agility in July 2016. Adjusted EBITDA was a loss of $1.2 million compared to income of $200,000 in the prior year.

Revenues were lower than our plan, primarily on account of the transition issues related to the acquired Agility business that we have mentioned in our earlier conference calls.

I'll now review key line items and segment performance on a sequential quarterly basis, comparing the fourth quarter with the third quarter. My comparisons will again exclude onetime costs and charges.

Total revenues in the fourth quarter were $15.7 million compared to $15 million in the prior quarter. On a segment basis, DDS revenues were $12 million compared to $11.6 million in the prior quarter. IADS revenues were $1.3 million or 13% higher than prior quarter revenues of $1.2 million.

Growth came entirely from the Synodex business. Media intelligence revenues rose to $2.3 million from $2.21 million in the third quarter. On a consolidated basis, gross margins, excluding onetime costs and charges, increased to $4.9 million or 32% of revenues in the fourth quarter, compared to $3.9 million or 26% of revenues in the third quarter, an increase of $1 million. The increase in gross margins primarily reflects the increase in revenues and cost efficiencies.

At the segment level, the gross margins in DDS were $3.5 million or 29% of revenues in the fourth quarter, compared to $3.1 million or 27% of revenues in the third quarter. Gross margins in our IADS segment increased to $350,000 from third quarter breakeven.

In our Media Intelligence, gross margins, excluding acquisition-related amortization expense were $1.1 million in the current quarter or 46% of revenues, up from $860,000 or 39% of revenues. The increase in gross margin in all 3 segments is due to the increase in revenues and increased cost efficiencies.

I'll now drill down to SG&A expenses. Selling, general and administrative or SG&A costs for the company were $5.1 million in the fourth quarter compared to $4.4 million last quarter. The increase in SG&A costs is primarily seasonal.

At the segment level, SG&A costs were $3.1 million in DDS; $200,000 in IADS; and $1.8 million in Media Intelligence in the fourth quarter. In the third quarter, SG&A costs were $2.7 million in DDS; $200,000 in IADS; and $1.5 million in Media Intelligence.

Our adjusted EBITDA was $500,000 in the current quarter compared to $400,000 in the prior quarter. The current quarter adjusted EBITDA is comprised of $1 million in DDS; $150,000 in IADS; and a loss of $600,000 in Media Intelligence.

Moving to net earnings. We recorded an income tax benefit of $0.5 million in the fourth quarter compared to a tax expense of $300,000 last quarter. After deducting tax expense and minority interests, our net earnings in the fourth quarter were $400,000 compared to a net loss of $700,000 in the third quarter.

Our cash and investment balance were $11.4 million in the fourth quarter compared to $12.5 million in the third quarter.

Our CapEx this quarter was $0.5 million compared to $600,000 in the previous quarter. In the first quarter, we expect CapEx to be in the range of $100,000 to $300,000.

I'll now turn to our ForEx hedging program and other items. At the end of the year, we had approximately $16 million in outstanding forward contracts to hedge a portion of our exposure for foreign currency denominated revenues and expenses. Based on mark-to-market, our forward contract has a notional gain of $350,000 at the end of fourth quarter.

We have evaluated the impact of U.S. Tax Cuts and Jobs Act that the President signed into law at the end of 2017 on the company. This act includes a broad range of provisions, many of which significantly differ from those contained in previous U.S. tax laws. One of the revised provisions in the act is a onetime tax on undistributed foreign earnings. Under the previous tax laws, income from foreign subsidiaries were generally not subject to U.S. tax until the income was distributed to the U.S. corporation. Under the new law, the U.S. corporation generally must include, as part of its income, the U.S. corporations' pro rata share of the post-1986 historical income of the foreign subsidiary.

We did an evaluation of the new provision with respect to our operations. This provision did not have any cash flow impact on the company as the income resulting from the new provision was offset against our available net operating loss carryforwards. As of the year-end, and after taking into account the offset against foreign income under the new tax provision, we have about $15 million in net operating loss carryforwards.

In terms of guidance, for the first quarter of 2018, we expect our first quarter revenues to be in the range of $13 million to $14.1 million, consisting of DDS revenue in the range of $9.8 million to $10.6 million; IADS revenue in the range of $1 million to $1.2 million; and MIS revenues in the range of $2.2 million to $2.3 million.

Thank you, and now I'll pass the call over to Jack.

Thank you, Raj. Good morning, everyone. Thank you for joining us today. I'm going to provide some additional context for the quarter's performance in each of our segments and touch on other announcements we made recently.

I'll start with our core Digital Data Solutions business. Our fourth quarter revenue was higher than our third quarter revenue by about 4% due to volume increases across a handful of projects. Looking at the year as a whole, however, we underperformed on the revenue side. DDS revenue in 2016 was $51 million, but in 2017 it declined to $47 million. The declines were the direct result of disappointing sales performance. We failed to book enough new business in either 2016 or 2017.

When we win new business, roughly half of its estimated value, which we record as a booking, becomes revenue in that same year and the other half is backlog that we recognized as revenue in the following year. As we exited 2017, our 2018 backlog was roughly $36.5 million, of which, 95% we regard as recurring revenue. We saw that if our bookings in 2018 were to turn out to be no better than our bookings in 2017, our 2018 revenue would be about $43 million in 2018. Based on this, we decided, first, to align our cost structure to a conservative revenue outlook that did not assume a significant booking improvement. And secondly, to put in place a plan to significantly improve sales performance. Under our cost structure alignment plan, we lowered our operating costs by approximately $3.5 million to align to our revenue outlook. This way, even as our 2018 bookings performance were not to improve, our adjusted EBITDA, excluding onetime costs, might nonetheless, improve over 2017 as well as 2016.

The cost reductions have come primarily from lower production costs, including fixed cost savings from facility consolidation, semi-fixed cost savings in support and delivery costs, and variable cost savings on production labor that results from technology innovation.

Our $1.2 million restructuring charge consists of severance costs related to this cost reduction. I think it is important to note that we have not shed costs associated with either sales or marketing or R&D, both areas in which we intend to increase investment over time.

In addition to the cost takeout, we are focusing on improving our bookings performance, which is the key to unlocking the operating leverage that will propel earnings and drive shareholder value. Toward this end, our board has asked that I take direct responsibility for driving DDS new business. I believe that we can best reverse the recent course by doubling down on our very successful R&D efforts that focus on AI and Machine Learning technologies and doing more to put these innovations at the heart of the conversations we have with our customers.

In addition, we will be redoubling our efforts at aligning our services, solutions and go-to-market strategies with the global data awakening, in which, enterprises are increasingly looking to incorporate digital data into workflow tools and advanced analytics. The problem many enterprises report is that they are unprepared to manage the complexities of creating value from raw and disparate data sets. It is towards this challenge that we will seek to align our capabilities in data extraction, transformation and enrichment.

I'll now move to our Synodex business. As we anticipated, we saw a continued revenue improvement in Q4 as a result of new engagements and seasonal demand. The IADS segment as a whole was up by 13% over last quarter, and the Synodex business was up 14% over last quarter. I'm pleased to report that Synodex achieved profitability this quarter, primarily due to continued improvement in our operating efficiency as a result of technology.

In the quarter, we were successful at winning the large opportunity with the current customer that we anticipated to win in our last call. The annual contract value of this new contract is approximately $800,000, and it is expected to start producing revenue in early Q2.

As we also anticipated last time, one of our other current account has decided to curtail its medically underwritten complex life insurance business, which is the portion of their business that our product supports. As a result, they will no longer require our services after Q1. Fortunately, our new win should offset this loss.

Our total pipeline value of opportunities that we're pursuing now stands at approximately $16 million in annual contract value, of which, about $3.7 million are most active and appear to have budget, although progress remains slow.

I'll turn now to our Agility business. Our Agility business includes both the Agility subscription-based SaaS products for media targeting, distribution and media monitoring as well as our enterprise media monitoring and analysis solutions. In Q4, our revenues were $2.3 million, an increase of 6% from Q3, and we added 72 new customers, with total bookings of $980,000 of annual contract value, making this our strongest quarter to date in terms of new business generation.

In Q4, much like Q3, we continued to see sequential quarterly increases in our leading indicators of new business generation. Our marketing qualified leads or MQLs increased by 20% over Q3, and our demos completed increased by 28% over Q3.

On the customer retention side, as we have been discussing on these calls, when we acquired the Agility database from PR Newswire last year, we inherited a large number of customers that were either not using the products, and as a result have not renewed or had other acquisition-related issues. We think we will see the last of these non-engaged, nonrenewing customers cycle out in Q1. Excluding these customers, our customer retention has been steadily improving. We expect to be showing net quarterly customer increases, beginning Q2.

In Q4, we completed our engineering integration with our back-end systems, which has enabled our engineering team to now shift to new product roadmap features and functions. In Q4, we released an innovative new feature called Influencer Streams that enables our clients to target and engage with media and influencers via their social media activity. And in early Q1, we released a new AI-powered feature that enables our customers to monitor not just texts but also images. This is useful for companies that want, for example, to track their brand references or logo usage and to analyze images based on how compelling shareable and on brand they are.

As we move into 2018, we're deeply engaged in Board-level activities to improve our operating performance. As we announced on December 5, our board formed a special committee to make an in-depth assessment of our segments. Our IADS and Agility investments have valued offerings and promising opportunities, expand our addressable markets, leverage our core assets and capabilities and promote recurring revenue. But each of these has its particular challenges and business model, which adds complexity to a company that is already complex.

To provide objective external input, the committee retained Al Angrisani, the turnaround consultant, to validate the course of this charting toward creating improved shareholder value and to evaluate each segment's strategy. In addition, it hired Outsell to perform a market needs assessment to help it consider ways in which the core business might best be aligned to emerging market needs.

In our December announcement, we also stated that the board's Nominating Committee would be reviewing all our overall board composition. Since that time, 2 of our company directors have indicated they will not be standing for reelection. Determinations have not been made final with respect to others. The nominating committee has undertaken an analysis of skills and experience that could benefit the company based on the current and emerging needs of the businesses, and it is presently interviewing candidates.

We also announced, in principle, areas to be designated. Fees to incumbent directors other than fees to the Audit Committee chairperson will be paid in restricted stock and that both AK Mishra, our Chief Operating Officer, and I would be taking 20% of our salaries in the form of restricted stock. We believe that this further aligns interests of our directors and executives with our shareholders at large. We're now working through the details of implementing this program.

Operator, we're ready for questions.

(Operator Instructions) And we'll take our first question from Tim Clarkson with Van Clemens and Company.

What do you think -- net-net, what do you think about your revenue breakeven is on a typical mix of revenues? What number would it be at right now?

You mean the breakeven point?

Yes, after you've taken out the expenses, yes.

So let's go by segment. Again, I'll give you a range. So for DDS, it's somewhere from $8 million to $8.5 million. For Synodex, it's like $3.5 million unchanged, okay? And for Media Intelligence, it's close to $10 million.

Okay. All right, now is that quarterly or is that annually then?

You're absolutely right. So for DDS, the number that I had was quarterly, I apologize. So it's about $34 million on an annual basis. Synodex, what I quoted was, annual number, $3.5 million unchanged and Media Intelligence, $10 million unchanged that's an annual number.

Okay. So $34 million, $8 million and $10 million?

That is right.

Right. Okay. And -- what now -- what's the story on this legal write-off again? I guess we lost something -- some deal in the Philippines on some old law suit?

Yes, and that's correct. So we ended up taking a contingency reserve for a lawsuit in the Philippines. We're continuing to appeal that judgment, but it was appropriate that we take that reserve.

Okay. Just kind of on a general basis, Jack, what do you think the growth prospects are for the 3 different businesses then?

I think that each has interesting opportunities. I think that if we can continue the good progress that we've been making on the -- in the Agility business on sales and marketing, the extremely strong leading indicators that we're seeing progress very well just quarter-to-quarter sequentially, that in combination with the improvements that we're forecasting in customer retention, as we move through some of the acquisition-related issues that we experienced, bode very well for a nicely growing business. Clearly, double-digit growth. The market is substantial. It's probably $1 billion to $1.5 billion market, and I think we've got the products to align well to that.

In the Synodex business, very different industry, very different dynamics there, as we know. But we've got a high-quality product, high-quality customers, that we achieve breakeven this quarter is long in coming -- too long in coming, probably, certainly for me. But we're there and I think that gives us a strong platform from which to, hopefully, accelerate.

DDS business has been challenging. I think though there is an opportunity that we're seeing in what I've come to now refer to as the Global Data Awakening. Increasingly, we've got enterprises who are looking to using digital data, fundamentally in their strategies and their operations, embracing Machine Learning, embracing Artificial Intelligence. And we think that our core capabilities, in terms of data extraction, transformation and enrichment, may have value to that industry. So as we think about growth there, there are several things that we're going to be doing. One is aligning our products and our services to that global data awakening. The second is finding even additional cost savings in how we operate the business and how we can operate the business by virtue of the great work we've done in AI and Machine Learning and taking some of those savings and redirecting them to go-to-market capabilities. And then, thirdly, making it my focus. Our best revenue-producing years was when I was most focused on the market. And the board is determined, I agree that I need to go back to that and put a whole lot of focus on that and get the bookings up.

Right, right. I mean, you've just been at it now for a couple months, are you starting to see some signs that you can make some things happen out there?

I think there's opportunity. And we're going to be working hard at it, and I think we've got the right plan. There is a lag in the bookings-to-revenue and then certainly, even from pipeline-to-bookings. So the progress that we're making now, I'm hoping that some of that accrues to our benefit in 2018. But it's -- certainly, if we can make that progress early in the year, it does, otherwise, it lines us up for improvements in 2019. But the fact is that as I said, just a few minutes ago, in 2016 and '17, sales just wasn't producing the level of bookings that we required to continue to grow. I think that we're going to be doing the things that we need to in order to reverse that.

All right. Now what -- in this last quarter, what percentage of your business would you say was repeatable versus not, was more project based?

Raj, do you have?

Yes, it's close to 80%, like 82%.

Okay. And there is some seasonality from fourth quarter to first quarter, typically. Why is that?

In the Synodex business, there is some seasonality because life insurance companies, toward the end of year all have sales contests, where their sales folks push real hard to bring in applications, and applications are what trigger the need for our service. I think there is less seasonality in other segments of the business.

(Operator Instructions) We'll take our next question from Joe Furst with Furst associates.

Raj, just a question for you. If I heard these numbers right and understood the other numbers, you said that breakeven point for the basic business is about $34 million a year, and your first quarter estimates are somewhere around -- between $9 million, $8 million and $10.6 million. Even at 10x, if you annualize that, that's $40 million. So that means your basic business would be fairly profitable for next year? Or am I missing something with the numbers?

Thanks, Joe. No, you're right. The math is right. Again, I was giving high-level numbers. Based on what you just mentioned, yes, the revenue estimate, at least for Q1, if you're annualizing that, that's going to be close to $40 million, and the breakeven is close to $34 million. So the numbers are right. Again, this does not include any onetime cost or any unforeseen costs that we may have to incur.

Sure. And then, in the Insurance business again, $1 million to $1.2 million that's roughly $4 million, and you said breakeven is about $3.5 million. So that again, that is a little bit profitable. And then with the new business it's -- go ahead

No, I was just echoing, that is correct.

Okay. And then the new business is just slightly less if your breakeven is $10 million and you're doing $2.2 million to $2.3 million a quarter, I mean, that's a little bit short, but if you can grow that a little bit then that would be pretty close to breakeven too. So that certainly will be much improved for this past and this recent quarters, which have been very disappointing. So glad to see that you have a more positive outlook.

And we'll go to our next question from Charlie Pine with Van Clemens & Co.

Yes. I have just a couple of things I wanted to get clarified. I think, when you were discussing in your remarks about retention of hiring turnaround consultants or around that point in the call, you mentioned that the business -- when you look at the business, you had $36 million in bookings for 2018, and I scribbled down something that said that you are looking at total business of about $43 million. Was that centered around -- was that -- were those numbers centered around DDS?

Charlie, yes, that was just talking about DDS.

All right. The other thing I wanted to ask about is when do you anticipate that you are going to get some kind of finalized list of recommendations from the turnaround consultants and the other organizations that you brought in, in December?

So we've gotten written -- or the board's gotten written recommendation from both of them and is continuing to work with them and to meet with them as well.

Okay. Have you acted at this point on anything that they presented to you at this juncture?

So the answer is, yes. I think the -- we were working with them in conjunction with and in parallel with the work we were doing in terms of improving prospective operating performance. So we were modeling the business and sizing the expense reduction that we need to do. And thinking about where in the business that could come out of without having a detrimental effect on future growth. We've worked with them on those plans.

(Operator Instructions) And we'll take another question from Tim Clarkson with Van Clemens & Co.

This isn't really a question, But I just wanted to put out there that at least from my vantage point though, that we really appreciate the contributions of O'Neil that were ongoing over the 2, 3 years, and that I know he left on good terms, and I'm guessing you feel good about him too. So I just wanted to put that out there. I really appreciate his contributions.

Tim. Thank you for saying that. I'm sure he'll be glad to hear that, and I echo exactly what you just said. We appreciate the -- his contributions as well. We had to make some very difficult decisions, as we sought to improve operating performance. They were made with great deliberation and -- but that doesn't make them not hard, and I definitely echo your sentiments on that.

Ladies and gentlemen, this concludes today's question-and-answer session. At this time, I'd like to turn the conference back to Mr. Jack Abuhoff, for any additional or closing remarks.

Thank you, operator. So yes, in closing, in Q4, we saw sequential revenue improvements in all 3 of our business segments. Synodex was profitable this quarter, as we had anticipated, we closed new large deals worth about $800,000, which will keep our revenue at about current levels next year, as we work then on closing new deals in our pipeline and Agility. We had our strongest quarter to date in terms of new business generation, and we think with continued improvements in marketing as well as the underlying customer retention metrics that we're continuing to see, we're going in to 2018 in a good position to deliver sequential quarterly growth. As I mentioned, our board's very focused on operating performance and shareholder value. We undertook a cost reduction program late last year, which we completed in Q4, which should lower our 2018 costs by about $3.5 million. We think this is the level of cost shedding we needed to do to be conservative to align to a low case 2019 revenue projection in DDS, while still making money and generating free cash flow. And lastly, our board has retained outside consultants to help it look at the business from both the strategic and shareholder value creation lens and is actively interviewing new directors. Again, thank you, everybody, for joining the call today.

Today's conference is available for replay from 2:00 p.m. Eastern time today to April 7, 2018, at 2:00 p.m. Eastern Time. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112, using passcode 1067298. Again, the numbers are (719) 457-0820 or 1 (888) 203-1112, passcode 1067298. This concludes today's conference. You may now disconnect.