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Edited Transcript of INOD earnings conference call or presentation 9-May-19 3:00pm GMT

Q1 2019 Innodata Inc Earnings Call

HACKENSACK May 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Innodata Inc earnings conference call or presentation Thursday, May 9, 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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* Timothy Clarkson

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Presentation

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Operator [1]

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Good morning, and welcome to the Innodata First Quarter 2019 Earnings Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Amy Agress. Please go ahead.

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

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Thank you, Kriyona. 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, who joined us last month on a part-time basis. Prior to joining Innodata, Robert was the Managing Director of the CFO Services Group of the Genova Group, a consulting firm that provides advisory and support services in the areas of complex accounting and financial reporting matters. A.K. Mishra, our COO, will be available for Q& A.

We'll hear from Robert first, who'll 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 being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements include, without limitations, any statement that may predict, forecast, indicate or imply future results, performance or achievements. 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 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 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, 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, and actual results could differ materially from our current expectations.

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

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Robert O’Connor, Innodata Inc. - CFO, Principal Financial Officer & Principal Accounting Officer [3]

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Okay. Thank you, Amy. Good morning, everyone. Thank you for joining us today to review our financial performance for the first quarter of 2019. Jack will later provide additional perspective on the business. I'll start with the review of key line items and segment performance on a sequential quarter basis, comparing the first quarter of 2019 with the fourth quarter of 2018.

Total revenues in the first quarter were $13.7 million compared to $15 million in the prior quarter, a decrease of $1.3 million. On a segment basis, Digital Data Solutions, DDS, revenues were $10.2 million in the first quarter of 2019 and $11.5 million in the fourth quarter of 2018, a decrease of $1.3 million as well. The decreased revenues in DDS are primarily related to decreased volume on several projects during the quarter.

Synodex revenues were $1 million in the first quarter compared to $1.1 million in the fourth quarter of 2018. Agility revenues were $2.5 million in the first quarter compared to $2.4 million in the fourth quarter of 2018. On a consolidated basis, gross margins were $4.1 million or 30% of revenues in the first quarter compared to $5 million or 33% of revenues in the fourth quarter of 2018, a decrease of $900,000.

At the segment level, gross margins in DDS were $3 million or 29% of revenues in the first quarter compared to $3.8 million or 33% of revenues in the fourth quarter of 2018, a decrease of $800,000. The decline in gross margin is due to lower revenues in the DDS segment, offset in part by a reduction in DDS segment's direct operating costs.

Gross margins in our Synodex segment decreased to $300,000 in the first quarter or 29% of revenues from $400,000 in the fourth quarter 2018 or 34% of revenues.

In our Agility segment, gross margins increased to $900,000 in the first quarter, or 35% of revenues, from $800,000 or 34% of revenues in the fourth quarter of 2018.

I will now go down to the SG&A expenses -- selling, general and administrative -- or SG&A costs, for the company were $4.6 million, both in the first quarter of 2019 and the fourth quarter of 2018. At the segment level, in the first quarter, SG&A costs were $3 million in DDS, $100,000 in Synodex and $1.5 million in Agility. In the fourth quarter of 2018, SG&A costs were $2.8 million in DDS, $200,000 in Synodex and $1.6 million in Agility.

Our adjusted EBITDA was $500,000 in the first quarter compared to $1.4 million in the fourth quarter of 2018. First quarter adjusted EBITDA is comprised of $600,000 in DDS, $200,000 in Synodex and a loss of $300,000 in Agility. Fourth quarter 2018 EBITDA was comprised of $1.6 million in DDS and $200,000 in Synodex, offset by a loss of $400,000 in Agility.

We recorded an income tax benefit of $30,000 in the first quarter compared to a tax expense of $300,000 in the fourth quarter of 2018. After deducting tax expenses and minority interest, our net loss in the first quarter was $452,000 compared to net earnings of $50,000 in the fourth quarter of 2018.

Our cash and investment balances were $12.2 million in the first quarter compared to $10.9 million in the fourth quarter of 2018. Our days sales outstanding in Q1 was 62 days compared to 66 days in the prior quarter. Our CapEx in the first quarter was $500,000 compared to $100,000 in the fourth quarter. In the second quarter of 2019, we expect CapEx to be in the range of $300,000 to $500,000.

In terms of guidance for the second quarter of 2019, we expect our second quarter revenue to be in the range of $13.1 million to $13.9 million, consisting of DDS revenue in the range of $9.6 million to $10 million; Synodex revenue in the $800,000 to $1.1 million; and Agility revenue in the range of $2.7 million to $2.8 million.

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

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [4]

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Thanks, Rob, and good morning, everybody. We had a tough quarter, as expected, in the core DDS business. Revenue was down by $1.3 million from Q4 in line with the guidance we provided last quarter. The drop resulted primarily from lower volumes of work from several customers during the quarter. Some of this was seasonal drop.

While our internal plan anticipated Q2 revenue improvement, in part due to seasonality and in part due to new signings, we've recently come to expect less revenue in Q2 from a client from whom we have a $4 million purchase order for 2019. The client just recently communicated to us its intention to proceed more cautiously on spend at least in Q2, and then reevaluate in June its budget plan for the balance of the year. So from a Q2 revenue perspective, this will likely offset the positive effect of seasonal recovery in new signings in Q2.

Looking at the revenue landscape more broadly. Our plan for the year is to try to hold revenue at roughly the same level as last year in DDS, while at the same time doing the necessary heavy lifting to reposition the core business for growth next year. The key enabler to our repositioning will be certain AI technologies that we developed and validated internally for the past 2 years. These technologies contributed to our turnaround last year, in which we increased our adjusted EBITDA at the end of 2018 to the highest that it has been as a percentage of revenue since 2014.

That having been accomplished, we now believe we can turn our AI focus externally, building these tested technologies into market-facing services and product offerings, designed around helping enterprises integrate AI into events, document and content transformation, which in turn are expected to increase revenues and drive growth for us. To accomplish this, we've brought on senior-level product management marketing talent, who will be working closely with our AI engineering team. We're enthusiastic about the work that's going on now. By the end of this year, you'll see clearly the repositioning that will have resulted from their work.

We continue to be optimistic that we will see growth this year, in both the Agility and the Synodex segments. In the Synodex business, we're continuing to work on opening new markets for our services. For now, we're staying under the radar a bit on these new opportunities, but I can say we have brought in 5 new charter customers from 1 new market, who are working with us to align our capabilities to their exacting requirements. They're finding that converting medical records into useful digital data holds the promise of enabling them to optimize workflows and to feed AI-based studies. We are enthusiastic that we have a clean path for growth in this market. On a less positive note, we had several days of system downtime in the past week as a result of an unknown bug in a standard commercial software program. Although we're now almost fully back up and running, we've lost several days of full production and ramping up some new clients.

In addition, a large data study that we plan to deliver in Q2 may extend into Q3, which could mean about $165,000 of revenue potentially shifting from Q2 to Q3. Although we have plans in place to mitigate these matters, we do expect an impact in Q2 revenue. Thus, for these reasons, our revenue guidance for Q2 includes a larger-than-expected spread.

In our Agility business, we recorded our strongest ever quarter in terms of customer acquisition with overall customer bookings of $1.3 million, which is an 18% increase from Q4. Additionally, our customer retention has showed significant improvement, and we believe our customer retention is now better than at least one of the largest players in our space. We also have some bragging rights to share. The latest G2 reviews came out and we were ranked as the #1 highest rated platform for media and influencer targeting and the momentum leader based on user satisfaction scores and digital presence. This is really great news and testifies to the work our product engineering has been doing. Given the strengthened customer retention and overall customer acquisition, we believe we're on target to deliver our expected growth.

This quarter, we will be releasing a new set of media monitoring features and functions into our SaaS subscription platform. We're excited about this new release, which will bring to our SaaS platform some very advanced capabilities that up until now only resided in the internal platform that we used for our large managed service clients. Even though some of these features and functions are quite complex, we've managed to keep the user experience intuitive and simple. I think our customers are really going to love what they will be seeing. The rollout will be starting this week.

Operator, we're ready now to take questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from Tim Clarkson from Van Clemens.

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Timothy Clarkson, [2]

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Welcome, Robert. Good to have you on as a CFO.

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Robert O’Connor, Innodata Inc. - CFO, Principal Financial Officer & Principal Accounting Officer [3]

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Thank you.

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Timothy Clarkson, [4]

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So just maybe a first question to both of you guys, whoever wants to answer it. So what roughly is the breakeven volume based on the current expense model that we have? It's -- I know you got it as low as, maybe $12 million, $13 million, but it looks like it's a little bit higher than that.

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Robert O’Connor, Innodata Inc. - CFO, Principal Financial Officer & Principal Accounting Officer [5]

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Currently, we have a breakeven model of DDS at $9.5 million; Synodex about $1 million; and Agility at $2.5 million, which means we hold steady on cash basis at $13 million.

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Timothy Clarkson, [6]

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$13 million. Okay. So ideally, if -- let's dream just a little bit, if revenues got to $15 million to $16 million, are we looking at a 10% net margin, overall?

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

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Tim, good morning. I think it depends on the business segment where we see the growth. So in DDS, growth would come for the next -- several millions of dollars, it would come in about 50%, you can figure contribution margin to the bottom line. In Synodex, that's probably more like 60%, 65%, and in Agility, it's 80% or more.

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Timothy Clarkson, [8]

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But there's a lot -- obviously, a lot of margin in all 3 businesses at higher revenues?

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

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Absolutely. And that's why, really, growth is just so critical to what we're doing. If I take you through those businesses, the key to growth in Agility is a combination of high net retention and new business plannings. So I'm very encouraged by what we're seeing now. Net retention has approached about 90%, which, in very, very rough numbers, is you have a $10 million base of business, that deteriorates to $9 million. But if you're adding $1.3 million, $1.5 million a quarter, you're adding $6 million, there's your 50% growth rate. So -- and again, those are rough numbers. But that's -- and the great thing about our venture businesses is it really addressing what has been the intractable problem that we know is in the core business in terms of revenue volatility. So in Agility, forecast fed out subscription-based business. And it has that kind of growth potential. In the Synodex business, much more forecast ability. There's slightly less, but still very powerful operating leverage on the revenue upside. And we've got a new market that we're opening, 5 chartered customers working with us. And I think we'll see a lot positive from that.

The core business as we see yet again inherent in that business is that revenue volatility, which can cut both ways. There were times we bring on a big new client and our prospects changed dramatically and very quickly. And then there's some unexpected something like, what I described in my prepared remarks, which end up taking what was promising to be an improving Q2 and kind of pulls the rug out from under us on that a bit. But even there, we've got plans. There's short-term plans. We're going to be using our product management marketing capabilities that we've just brought on this year to do some work that we think we can do to kind of shore that up. The goal being to maintain our revenue level there, but then much more exciting, I think, in longer-term, is fundamentally addressing our go-to-market and our product service architecture in that business to make it much more technology-based, align it to higher quality in revenue and to drive that based on the AI we've developed and proven out internally over the last 2 years. So we'll persevere in terms of riding the waves and choppiness in the business, but we are working harder at that fundamental repositioning.

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Timothy Clarkson, [10]

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Right. So what would be the fundamental advantage using this new AI with one of your typical customers where you'd be doing similar things to what you did internally. So what exactly does it -- are the benefits? And how much complexity is involved?

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

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Yes, a great question. So there are a lot of business who have processes that are difficult to manage. They are people intensive and they are around having to process documents -- having to process -- documents can be anything from contracts, to medical records, to studies, to reports, to trade bills of lading. They're all over the place. And what we know about documents is computers can't read them easily because it's hard to extract concepts from them. What we're able to do with our AI is we are able to make that process much less people intensive. And to make those documents readable by computers, and that's the key thing. I mean that's really about what we've been doing in our Synodex business, our docGenix business. It's what we've been doing in our core business to produce publishable product for large information providers. So what we're doing now is we are saying okay.

Where are there problems out there in the world in enterprises, where people are still contending with the fact that there is effectively non-digital data. There's data that computers can't read real well, and we've trained AI models to be able to dramatically reduce the human intervention required to make those machine readable. And we have the capabilities now and we're learning to know how to mix AI with human expertise to achieve a very efficient and very high-quality result. So we brought on the product manager, who was product manager at IBM Watson. He's very intrigued by what we are doing. He thinks there's a lot of applicability in the market. We've brought on a marketing lead from another high-profile company, and they're working on productizing those things.

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Timothy Clarkson, [12]

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So now you mentioned this medical application, where you're taking medical records in? Is that a new business for you? And how does that fit into the overall scheme? Is this a DDS deal? Or where does this all fit?

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

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Sure. So yes, it's insure -- it's related to the insurance thing to the Synodex business. What Synodex does is it does this thing that we've been talking about last few minutes, taking text documents and making them into computer readable structure documents that can be analyzed, can be compared, can drive other workflow engines, can drive other applications. And what Synodex does is it does that for medical records. So that's its expertise, medical records. So what we're finding is that there some other markets in addition to life insurance who are looking at that and saying, "hey, that can help us." We want to -- it's a bottleneck right now for us to deal with these medical records that computers can't analyze. Or we are looking to create that digital representation of those records and feed that into AI engines, that will give us new insights into our markets in our business.

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Timothy Clarkson, [14]

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And it's a pretty big market, isn't it?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [15]

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It's -- the new markets that we've found are intriguing. We're not going right now headstrong into the largest markets because we've got some competition there, but we're finding some places where the documents are particularly thorny. There it's hard to work with. And our mix of AI, computers and people are very well received. We've got -- in this new market, we've got 5 customers who are telling us exactly what they need. They are testing new versions of our product. So we've taken life insurance product. And we've reconfigured it for this new market, and we're hearing good things. And it looks like...

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Timothy Clarkson, [16]

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How much business is potentially there? I mean, would this -- could this add $0.5 million worth of the business a quarter? Or how big is it?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [17]

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I think it could be more than that. I don't really -- I'm not prepared to share kind of who the markets are or what the size is yet. I want to stay conservative on that. I don't want to...

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Timothy Clarkson, [18]

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Yes. But you guys -- But I guess the point is that you guys have already proven that you can do it, right?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [19]

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Yes. We've -- We're proving that we can do it. We're still in that kind of testing phase with most of the 5 clients who signed, I think, 1 or 2 of them so far, but the smaller ones. But we're working with some very large ones, continuing to refine and test. But it's going well.

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Timothy Clarkson, [20]

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Good. All right. Well, it sounds good. I'm looking forward to meeting the IBM guy at the annual meeting. So I assume he'll be there, right?

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Jack S. Abuhoff, Innodata Inc. - Chairman, President & CEO [21]

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He will be now. Good news is that you'll be coming. Looking forward to seeing you.

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Operator [22]

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(Operator Instructions) As there are no further question signals, I'll now turn the call back to your host for any additional or closing remarks.

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

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Thanks, operator. I guess I'll just underscore a couple of key takeaways from this morning's call. In DDS, we are off to a difficult start to the year, no question about it primarily as a result of lower-than-expected volumes. Our new product management, marketing and groups -- and our sales group are going to be doing some short-term work with a stated goal of staying leveled with last year in terms of revenue. At the same time, in 2019, we're working on exciting strategy to turn our AI development into market facing product to fundamentally reposition the core business for sustained growth. Meanwhile, in Agility, we're expecting growth this year, thanks to significantly improved client retention. Our best quarter ever in terms of sales, and a product that continues to receive strong industry recognition. Synodex, we're also seeing growth this year, and we are deep into working with shorter customers in new markets where we see solid growth opportunities.

So thank you all for joining us today. We'll look forward to reporting on our progress as we continue through the year.

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Operator [24]

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Today's conference is available for replay from 2 p.m. Eastern time today to June 8, 2019, 2 p.m. Eastern time. You may access the recording by dialing (719) 457-0820 or 1 (888) 203-1112, using passcode 4058631. This concludes today's conference. You may now disconnect.