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Edited Transcript of INOD earnings conference call or presentation 8-Aug-19 3:00pm GMT

Q2 2019 Innodata Inc Earnings Call

HACKENSACK Aug 10, 2019 (Thomson StreetEvents) -- Edited Transcript of Innodata Inc earnings conference call or presentation Thursday, August 8, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Amy R. Agress

Innodata Inc. - Senior VP, General Counsel & Corporate Secretary

* Jack S. Abuhoff

Innodata Inc. - Chairman, President & CEO

* Robert O’Connor

Innodata Inc. - CFO, Principal Financial Officer & Principal Accounting Officer

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Conference Call Participants

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* Joe Furst

* Timothy Clarkson

Van Clemens & Co., Inc. - Stockbroker

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Presentation

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Operator [1]

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Good morning, ladies and gentlemen, and welcome to the Innodata Second Quarter 2019 Earnings Call. Today's conference is being recorded. And at this time, I'd like to turn the floor over to Amy Agress. Please go ahead, ma'am.

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Amy R. Agress, Innodata Inc. - Senior VP, General Counsel & Corporate Secretary [2]

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Thank you, Greg. Good morning, everyone. Thank you for joining us today.

Our speakers today are Jack Abuhoff, Chairman and CEO of Innodata; and Robert O'Connor, our CFO. A.K. Mishra, our COO, will be available for Q&A. We'll hear first from Jack who will provide perspective about the business, and then Robert will follow with a review of our results for the second quarter. We'll then take your questions.

First, let me qualify the forward-looking statements that are made during the call. These statements are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitation, any statement that may predict, forecast, indicate or imply future results, performance or achievements. These statements are based on our management's current expectations, assumptions and estimates, and are subject to a number of risks and uncertainties, including without limitation, the contract may be terminated by client; projected or committed volumes support may not materialize in whole or in part; 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 Digital Data Solutions segment revenue concentration in a limited number of clients; our inability to replace projects that are completed, canceled or reduced; our dependency on third-party content providers in our Agility 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; potential impairment of the carrying value of goodwill and other acquired intangible assets of companies and businesses that we acquire; changes in our business or growth strategy; the emergence of new or growing competitors; potential effects in our results of operations from interruptions and/or breaches of our information technology systems; and various other competitive and technological factors and the other risks and uncertainties indicated from time to time in our filings with the Securities and Exchange Commission, including our most recent reports on Form 10-K, 10-Q and 8-K and any amendments thereto.

We undertake no obligation to update forward-looking information or to announce revisions to any forward-looking statements, except as required by the federal securities laws, and actual results could differ materially from our current expectations.

Thank you. I will now turn the call over to Jack.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [3]

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Thanks, Amy, and good morning, everybody.

We are at an exciting time in our company's history. We can see that the business transformation we started a year ago is now poised to bear fruit. We believe we are positioned in the company on a course for future double-digit revenue growth, margin expansion and simplification of our business model. For example, our Synodex business is hitting its stride, and we expect strong revenue growth in that segment in the third quarter. This is because we are seeing acceleration in both our core life insurance market, and we are now closing business in a new market we started developing this year.

In our Agility business, an online business review platform ranked us as the #1 easiest-to-use media and influencer targeting platform and the momentum leader based on company growth and customer satisfaction ratings.

In our DDS business, we used our expertise in machine learning and AI to drive significant costs out of that business, and that process is still ongoing. But now we are also creating products utilizing our strengths in machine learning and business process automation and our ability to use human experts to train machines as business accelerators to target other clients and other industries to significantly enhance our addressable market.

Importantly, we are incorporating the lessons we have learned through such implementations internally, which means that we have a great head start here.

We expect to share with you more details about all our business segments in our next earnings call and our confidence in the strong revenue and profitability growth prospects of the company. We'll also explain the common thread that runs through all our businesses, which is transforming unstructured data into a productivity tool that enhances growth and lowers expenses for us and our clients.

Our optimism around the work that we are doing is reflected in the stock buyback we announced in July.

Our current market cap is about $30 million, and with $12 million in cash, our enterprise value is at mere $18 million today. We believe that each of our 3 businesses is worth more than what our stock price reflects. For that reason, I'm very pleased that our Board has decided to execute the stock buyback program we announced. I strongly agree with the board's decision to execute buybacks at current prices.

I'm also really happy that Nick Toor has agreed to join our Board. Nick is a major investor who clearly believes in the promise of Innodata, owning approximately 1.3 million of our shares personally.

Prior to being a hedge fund manager, Nick had a distinguished career as an investment banker. I've known Nick for many years, and I've watched him succeed at almost everything he sets out to do. Nick has shared initiatives that hold great promise in order to accelerate performance and be valued by the market, and I'm confident that the company will benefit from his accumulative wisdom and willingness to dig in.

I will now turn the call over to Rob who will take you through the quarter and share some of his own thoughts.

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Robert O’Connor, Innodata Inc. - CFO, Principal Financial Officer & Principal Accounting Officer [4]

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Thank you, Jack. Good morning, everyone. As Jack said, we're excited about the transformation that we've been driving, and we look forward to sharing results of the efforts and provide you more color next quarter. The results that we're reporting today do not reflect the transformation that we are working towards.

After a quick overview, I will share my perspective on the business model so that you can appreciate where we are heading.

So first the results. Consolidated company revenue and revenue in our Digital Data Solutions segment were essentially flat sequentially.

Synodex revenues were lower in the second quarter by $100,000. Agility revenues were higher in the second quarter by $200,000.

On a consolidated basis and in DDS, gross margins stayed steady quarter-to-quarter, while gross margins in our venture businesses reflected both the revenue gain in Agility and a lower revenue in Synodex.

SG&A expenses were flat in all businesses, except for Synodex, which was $100,000 higher in the second quarter.

Our adjusted EBITDA was $350,000 in the second quarter of 2019 compared to $460,000 in the first quarter. The $350,000 adjusted EBITDA was after $400,000 set aside for social security contributions in India for prior years that became necessary due to an unexpected result in the Indian Supreme Court case that affects companies generally.

We recorded an income tax expense of $100,000 in the second quarter and a tax benefit of $30,000 in the first quarter of 2019. After deducting tax expenses and minority interest, our net loss in the second quarter was $650,000 compared to a net loss of $450,000 in the first quarter of 2019.

Our cash and investment balances were $12.3 million in the second quarter, slightly higher than the first quarter. Our days sales outstanding in Q2 was 63 days in the second quarter, essentially no change from the first quarter.

Our CapEx was $500,000 in both quarters.

In terms of guidance, for the third quarter of 2019, we expect our third quarter revenue for DDS and Agility segments to be substantially similar to revenue in the second quarter, and we're expecting strong revenue growth in our Synodex segment.

As we move forward with strategic changes and focused on new initiatives, we will no longer be providing revenue guidance on a quarterly basis.

I'd now like to say a few words about our business model. As Jack mentioned, we believe we are positioning the company on a course for double-digit revenue growth. We expect that the incremental effect of this growth after our breakeven point by segment will be significant.

Specifically in DDS, depending on the mix of new business, we anticipate that approximately 40% of growth would go directly to increase our net income.

At Synodex and Agility, since the operating platforms have significant ability to scale, we anticipate approximately 60% and 70%, respectively, would directly increase our net income.

Thank you, operator. We're ready to take questions now.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And first from Van Clemens, we have Tim Clarkson.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [2]

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Sounds exciting. It sounds like in the Synodex division that some of these new initiatives in artificial intelligence are starting to bear fruit. I -- is that where the incremental new business is coming from?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [3]

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I think in Synodex, we feel like we're, as I said, really hitting our stride. We're seeing pickup in terms of the work we're doing in our core life insurance segment where we had some companies who are evaluating our service against other services. Our service continues to improve. We continue to integrate new technology into it. And then in addition to that, we've started tapping into a new market that we had identified fairly recently, and we're seeing great pickup in that new market. So the combination of all those factors, continued development, renewed traction in life insurance market and traction in this new market will all be contributing to the results in the next few quarters.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [4]

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Right. And this is all repeatable business. It's not onetime projects, right?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [5]

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We do see some onetime projects in the business from time to time. We'll get a company who wants to do a data study, for example. They want to validate what they see as the value in the data that we're producing and build some models to determine projected value and things like that. So there will be some. But for the most part, this is all recurring business. And we will be seeing -- we predict a very strong growth in annual recurring revenue year-over-year when we conclude this calendar year.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [6]

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Right. In terms of -- are there other -- what would be the next most obvious area using these artificial intelligence tools that you guys could get some new business in?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [7]

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Sure. We're looking at that pretty broadly. As we've said, our first effort was using and deploying those tools internally, understanding how do you augment the work that people do with these tools, how do you create truly AI-first workflows and that we're turning that into product and we're facing that product off against some new markets. I think we'll be in a good position next quarter to provide a little bit more detail around that.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [8]

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Obviously, the new guy from IBM is doing a good job.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [9]

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Yes. No, he's been a great addition to the team. And we've added some marketing resources. We're adding some sales resources from the new markets that we've identified. So exciting things are going on.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [10]

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Right. Now in terms of potential net margins, I mean, obviously at this level of revenues, you're about breakeven. But with the incremental revenues, there should be a potential to make 10%, 15% to 20% net at somewhat higher revenues, right?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [11]

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Yes. And I think that's why Rob's specifically wanted to mention that in his prepared remarks. The opportunity is considerable. There is a tremendous amount of leverage on fixed costs in business. And it's going to be about growth, and growth is going to be about hitting the market at the right time. The AI that we're focusing on and specializing in is deep learning, and it's the branch of AI that holds the most promise for business today. Businesses in multiple markets are looking to build that into an essential core strategy that they have. And having accurate comprehensive data is critical for the outcomes that they're aiming for. I think we're going to be in a great position in order to help them accomplish that.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [12]

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I like to think of what you guys are doing is kind of having a starter kit, you can digitize the data, you have the machine learning tools and then you have the experts that can collaborate to make sure it doesn't go down rabbit holes. Now what would be the typical size contract for one of these like starter kits? I mean what would be the range or size of contracts you'd be looking at?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [13]

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I think we'll be able to provide a little bit more quantification around the specific services that we're talking about and the broad strategy we have to enter some new markets in our next call. And given what you're asking, we'll try to provide some color and what contract size might look like as well.

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Operator [14]

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And moving on, we have Joe Furst with Furst Associates.

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Joe Furst, [15]

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I'm not quite clear on your answer to Tim's question about the AI. I thought the AI business was being in Agility section of your company. And have you gotten any new business in that area? Or is the business you're talking about, Synodex, is that AI related? Or is that something different?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [16]

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Yes. So the AI that -- we're using AI in all of our businesses. That's going to be part of our strategy. But for the most of the AI investments that we've made has actually been in our core business, and we used that investment early on in order to drive operational excellence and help us with our cost rationalization and turnaround of that business last year. Now what we're doing is we're building that into market-facing products that will help us expand our addressable market. I think one of the limiting factors that we've had has been the size of our addressable market. And given what's going on in the world today, how businesses are integrating AI, is an essential core strategy. But they need accurate comprehensive data in order to drive the intelligent predictions that they're looking for as outcomes. There's an opportunity for us to significantly break out of that rather small addressable market. On top of that, the types of technologies and the things that we're developing also have applicability in our core market. So we very much value the customers that we've got and the kind of customer base that we've got, and we're going to be able to address their needs as well as break out and expand those addressable markets.

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Joe Furst, [17]

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But the question is, have you gotten any new business in AI specifically?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [18]

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Yes, we have.

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Joe Furst, [19]

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Okay. So you have got some new contracts. Okay. And then are you taking any other steps to increase your basic business, because that's still the main part of your business and one of the main things that needs to grow to have you keep doing better?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [20]

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We have. I think if we look at the venture businesses, Synodex is on a great path right now. Agility is about sales execution. The AI play that we see is around the technologies and the skills and the capabilities we have in the core business. So it's that business that we're going to be trying to now reposition this year so that it's on a much stronger glide path. And we see the market opportunity in order to do that.

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Operator [21]

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(Operator Instructions) And it looks like we have a follow-up from Mr. Clarkson with Van Clemens.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [22]

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Jack, I noticed that Thomson is really emphasizing their AI initiatives to get their company turn around. I know you do a lot of business with Thomson. Would that be the kind of company you would be talking with potentially to get some artificial intelligence business?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [23]

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So Tim, we'll speak about broad markets. We don't like to speak about individual customers. Thomson is a business information provider. They're part of -- and a very significant important player in the market that we've served historically. And that will remain an important part of our market. AI strategies are very important to that market, and we've been engaging with them and continue to increase engagement around AI. That will continue. In addition to that, in order to drive growth, we're looking at opportunities that we now have before us in order to expand addressable market.

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Timothy Clarkson, Van Clemens & Co., Inc. - Stockbroker [24]

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In other words, you guys have discovered a new -- new markets where you can get bigger and where you can show a lot more growth?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [25]

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That's correct.

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Operator [26]

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And we'll move back to Joe Furst with Furst Associates.

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Joe Furst, [27]

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I want to commend you for buying back your own stock, but they are very sensitive stock prices, so low in relation to the real value of your company. But have you actually bought any yet?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [28]

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No. We have not. When we announced the buyback, we were in a quiet period in anticipation of the earnings call. And I think we won't be in a position to start by and probably for a couple of days after. I think that's what the law requires. So -- well, I'm just informed Monday, they'll begin to show up in the market.

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Operator [29]

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And ladies and gentlemen, at this time, that does conclude the question-and-answer session of today's call. I'd like to turn the floor back to our speakers for any additional or closing remarks.

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [30]

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So thank you, operator. I guess I'll just underscore a couple of key takeaways from the call. We believe we are in a better position now than at any time -- sorry, we believe, as I was saying, that we're in a great position now, probably better than any time in our past to take advantage of really significant trends in business and technology and the way businesses seek to extract benefits from data.

I'm excited to share with you in the next quarter more specifics about our initiatives and our confidence in how we are repositioning the company toward being a consistent double-digit growth company with an ever-increasing share of recurring revenue and a larger addressable market.

Thank you all for joining us today, and we will look forward to reporting on our progress through the year.

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Operator [31]

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And ladies and gentlemen, today's conference will be available for a replay from 2 p.m. Eastern Time today for 30 days until September 7, 2019, at 2 p.m. Eastern Time. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112 using the passcode 9175657.

Again, that does conclude today's conference. We thank you for joining us, and you may now disconnect.